Mr. Cooper Group Inc. (COOP) Q4 2021 Earnings Call Transcript

Mr. Cooper Group Inc. (COOP 2.15%)
Q4 2021 Earnings Call
Feb 11, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello. Thank you for standing by, and welcome to Mr. Cooper Group Q4 2021 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, Ken Posner. Please go ahead.

Ken 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 SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, chairman and CEO; Chris Marshall, vice chairman, president, and CFO; and Jaime Gow, deputy CFO.

As a quick reminder, this call is being recorded. Also, 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

Thanks, Ken, and good morning, everyone, and welcome to our call. We've just closed out an exceptional year, and I'd like to open by recognizing my fellow Coopers for everything you've done to care for customers and produce such strong results. I've been amazed at your commitment and hard work while dealing with all the pandemic challenges. Thank you.

Thank you. Thank you. In a moment, I'll share some thoughts on the outlook, but let's start, as we always do, by reviewing the quarter's highlights. And this is worth doing because we accomplished a great deal in the fourth quarter, and it capped out and made the year.

We'll turn to Slide 3. Net income for the fourth quarter was $155 million or $2.01 per share, which was equivalent to a return on tangible equity of 14.9%. For the full year, operating return on equity was 25.7% which, as it turns out, was exactly what we guided you to expect a year ago. During the fourth quarter, both Originations and Servicing turned in results that were ahead of our expectations.

Servicing outperformed on EBO revenues, and our DTC teams did a fantastic job driving recapture and cash-out refis. And as a result, the origination margin actually increased for the quarter from 1.27% to 1.41%. Thanks to the strong operating results, as well as a positive mark on the MSR, tangible book value increased to $43.82 per share. And I'd like to point out that on a year-over-year basis, this was a 67% increase.

Let's talk about that for a moment. We had strong operating results in 2021. Positive marks on the MSR. We had gains from monetizing three out of Xome's four businesses, and we were able to opportunistically retire shares at attractive prices.

Now we don't expect to grow TBV at this rate in most years, but there were some key themes in 2021 that are worth highlighting because they're core to the Cooper story, and these include: an intense focus on operations; an opportunistic approach to capital allocation; and the willingness to monetize assets when that makes sense strategically. Turning to the servicing portfolio. Growth accelerated to 6% in the quarter on the back of strong acquisitions. As a result, we closed out the year up 17%, and we're excited about the momentum heading into 2022.

Shifting to capital management. We repurchased $56 million of our stock during the fourth quarter at an average price of $41.22, which was a 6% discount to fourth quarter TBV. We expect to generate continued growth in TBV and we believe those shares represent outstanding value. I'm also pleased to report that the board has authorized an additional $200 million, bringing our total authorization to $252 million as of today.

The balance sheet is in the strongest shape of the company's history. Thanks to the sale of the Reverse business, we achieved and surpassed our target of 15% tangible net worth to assets, while at the same time simplifying our financials and streamlining our business model. The company generated very strong cash flow during the quarter with $171 million in steady-state cash flow. And when it comes to cash generation, our balanced business model is very different from peers.

Our large servicing portfolio throws off huge amounts of cash. Our DTC unit is consistently cash flow positive, which is rarely the case for traditional origination channels, and the DTA shields us from paying federal taxes. Thanks to strong cash flow plus the senior notes offering we completed in the fourth quarter, we're starting the year with $895 million in unrestricted cash and a total of $1.7 billion in liquidity, which is a lot of dry powder. Now let's turn to Slide 4, and we'll share our latest thinking on 2022 outlook and beyond.

This guidance is based on the current yield curve, which anticipates the Fed tighten four times this year, with 30-year mortgage rate increasing from the current levels to around 4% and continued economic growth. Let's start by talking about return on tangible equity. After two years of outperforming our targets, we're now starting the year where returns are going to be at the lower end of the 12% to 20% range, which is what we've guided you to expect in most environments. This shouldn't be a surprise.

It's just the reality that Originations normalizes very rapidly while it will take a few quarters for Servicing to hit its stride. Having said that, let's talk about TBV growth where the outlook is stronger. In fact, the outlook for TBV growth is really quite excellent because in addition to operating earnings, there's a strong likelihood that we'll mark up our MSRs for higher rates. And as you know, a successful monetization of Xome would drive substantial benefit for TBV.

As we head into 2023, we expect ROTCE to start rising again and potentially to structurally higher levels as we're working on a number of strategic initiatives designed to drive lower cost and wider margins. Now let's talk about Servicing portfolio growth where the outlook remains very promising. For 2022, we'd expect at least 10% portfolio growth. And I'd be surprised if we didn't do better.

Activity in the bulk market remains quite strong. In fact, we just won another large portfolio last week. At the same time, we're seeing new opportunities in subservicing. We're in talks with a number of potential clients, including MSR investors who recognize the significant technology investments we've made and what that means for recapture.

And I'm confident that we'll soon be reporting some new client wins. Let's spend a moment on capital deployment as these are probably the most important decisions we make on behalf of our stakeholders. As you know, we've established a strategic target of $1 trillion in UPB, which would be around 5 million customers. We believe this level of scale will constitute a major competitive advantage.

We're actually moving toward that goal faster than we expected, and we're very excited about this momentum. However, I want to remind you that every single acquisition we make is subject to return hurdles. We've never chased market share, and we aren't about to start. What you're seeing right now is the thesis, which we laid out for you more than a year ago that rising rates would pressure originators to sell the MSRs they were holding on to during the pandemic.

And because there are relatively few firms with the capital and operational capacity to take on portfolios, the pricing is excellent. If this changes next quarter, we'll pull back. And we've been working on our platform for many, many years, and we have no problem being patient. Our second priority is to return excess capital through stock repurchase, especially when the share price is attractive as it is right now.

Finally, I want all of our investors both equity and debt to understand our commitment to managing capital and liquidity in a manner that inspires confidence in our balance sheet. That's exactly what you saw us do last year when we grew the portfolio, bought back stock and ended the year in an even stronger state. Now if you'll turn with me to Slide 5, I'll wrap up my remarks with some comments on technology. We are in the business of continuously building solutions for our team members and customers, and we also look for ways to extract value from our assets and platform.

Xome and our proprietary technology solutions are perfect examples of this. For example, part of what made our title unit such a profitable business was the automated title underwriting engine called X1. X1 provides instant clear to close, which helps speed up the underwriting process. And X1 was an application that we developed, and it was part of the reason we got such an attractive valuation for our title unit when we exited the business last year.

As another example, you've heard us talk about our award-winning cloud-based document reading technology, which we now call Pyro. Thanks to machine learning, we can scan enormous quantities of documents with very high accuracy rate. This is a huge advantage to us in onboarding large portfolios. We're now licensing this technology to other mortgage companies, and I'm pleased to report we just signed up our first customer.

And you're all familiar with our Xome Auction Exchange, which is a digital cloud-native platform with very strong margins and a steadily growing No. 2 market share. Most of the revenues now come from third-party clients, and I just want to remind you that we built the exchange from scratch. And that brings us up to the deal with Sagent Lending, which we announced this morning.

Let's start with the terms. We're conveying the rights to our proprietary servicing platform to Sagent, which is owned by Warburg Pincus and Fiserv, and provides mortgage servicing solutions to banks and other lenders. Sagent, in turn, will integrate our native cloud platform onto a cloud-based core and offer the first ever cloud-native servicing platform to the mortgage industry. In exchange for the rights to our platform, Sagent is providing us with an equity stake in their company and two board seats.

In the first quarter, we expect to record a pre-tax gain of approximately $225 million related to the sale. And we would fully expect this equity position to appreciate significantly as Sagent delivers on its mission of disrupting the status quo. This is a very significant development for the industry and for Mr. Cooper.

For the industry, this will be the first cloud-native servicing platform. It's going to force every single operator to migrate their system to the cloud or face significant competitive disadvantages. For Mr. Cooper, this new platform will drive efficiencies, both in terms of operating costs and ongoing cost of maintaining and upgrading the technology.

We'll be able to shift more development resources to the customer experience layer, which consists of those applications that are critical to driving customer delight. And with that, I'll turn the call over to Chris.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Thanks, Jay, and good morning, everyone. If you all turn to Slide 6, I'll start with a high-level summary of our financial results. Overall, we were extremely pleased, especially given the market that's starting to normalize. Net income for the quarter was $155 million or $2.01 per share, which included a positive $46 million mark-to-market; a $20 million loss from discontinued operations, which represents two months of activity in the Reverse business, which is now gone; and adjustments of $31 million, most of which relate to the sale of Xome Field Services.

Pretax operating income was $156 million, and fully taxed operating ROTCE was 14.9%. Originations produced $182 million in operating EBT on strong performance in DTC, where we saw really nice growth in recapture and in cash-out refinances. Servicing was stable quarter over quarter and produced $41 million in operating EBT, largely driven by $91 million in EBO revenues. You will note that corporate debt interest expense increased from $30 million to $36 million, which reflects two months of interest expense related to the senior notes we issued in November.

So going forward, you should be modeling $39 million in corporate debt interest expense each quarter. Adjustments totaled $31 million, which included a $34 million gain from the sale of Xome Field Services and $3 million in severance charges. Now let's turn to Slide 7 and talk about tangible book value, which we view as a critical measure of shareholder value. Thanks to strong income, TBV finished the year at $43.82 per share.

The chart on the right provides you with a year-over-year walk for the 67% growth, which Jay has commented on. To recap 2021, we benefited for more than $1 billion in pre-tax operating income, over $400 million in positive marks and $528 million in gains from the sale of three out of the four Xome businesses. In addition, we opportunistically repurchased 16.9 million shares for $600 million at a weighted average price of $33.80. Since initiating the stock repurchase program, we've now retired 20% of the company's shares.

And given our outlook for future growth in TBV per share, we believe the return from repurchasing shares will turn out to be extremely high over time. Looking ahead, we fully expect to keep growing TBV per share. To start with, in most environments, we expect returns on equity to range from 12% to 20%, which will grow retained earnings. And to the extent that interest rates rise faster than expected, TBV should also benefit from positive MSR marks.

In fact, if we close the books today, we'd expect to record a positive mark of at least $300 million. Additionally, and as we've previously shared with you, we're actively exploring monetization options for the Auction Exchange, which we think is certainly the most valuable of all the Xome business units. And finally, we'll continue to repurchase stock on an opportunistic basis. Now let's turn to Slide 8 and discuss the valuation of our MSRs, which are obviously the most important assets on our balance sheet.

In summary, we marked up our MSR value by 3 basis points to 124 basis points of UPB, which reflects the 10 basis point increase in mortgage rates during the fourth quarter, leading to a slightly lower expectation of lifetime CPR speeds and a 32 basis point increase in swap rates, which point to higher custodial deposit income over time. Now each quarter, we talk about the number of customers who can save money or access cash through refinancing. Over the last three months, the number of customers who could benefit from a pure rate term refinance has declined, as you'd expect with higher mortgage rates. However, with strong home prices, we've seen a very meaningful increase in the population of customers with equity in their homes.

This is another large source of business for DTC. Also, while interest rates and home prices are important in the short term, I'd point out that the company's total customer base grew by 3.6% in the quarter, which bodes well for opportunities over the longer term. OK. Let's turn to Slide 9, and I'll talk a little bit about the impact to Mr.

Cooper from changes in rates. Obviously, for all mortgage companies, interest rates are top of mind right now. So we're providing you with some extra transparency into our balance sheet and a few examples of how we benefit from our balanced business model. Now this slide shows you estimated marks for our MSR portfolio in five different rate scenarios, as well as some directional guidance on how these scenarios would impact our operating results.

These five scenarios include two parallel shocks, which are plus or minus 50 basis points, and three scenarios where the yield curve twists. Now so far, this year, rates have mostly tracked the parallel shift we're showing you here. And as I just mentioned, if we close the books today, we'd expect to record a mark of at least $300 million. As you look across the scenarios, you'll see that the marks reflect movements in both the long and short end of the curve.

The long end of the curve drives prepayment speeds, which affects amortization. And short-term rates drive yields on our custodial deposits, which totaled $14 billion in the fourth quarter and which right now are yielding close to nothing. I'd also point out that MSR values are sensitive to spreads between mortgage rates, MBS and swaps and that these estimates include our best judgments on how spreads would change in these scenarios. And finally, I'd point out that we do have in place a very small hedge, which covers the portion of the MSR where we have outstanding line draws and simply want to clarify that these estimates are showing you impacts net of that hedge.

Now clearly, interest rates lie outside of our control. So as we think about our business, our focus is on what we can control, such as simplifying and automating more of our processes, grinding out lower unit costs year in and year out and, of course, delighting every customer with a personalized and friction-free experience. Now let's turn to Slide 10 and talk about the Originations segment, which produced pre-tax operating income of $182 million, which was slightly above our guidance due to very strong performance in DTC. In fact, I'd highlight that our margin was actually higher in the quarter, moving from 127 basis points to 141.

Now that change in margin should drive home the point that our originations model is quite different from our peers. For one, since we're serving existing customers, we have significant flexibility on pricing. And at the same time, we spend relatively little on marketing. Additionally, we've started taking actions to rationalize capacity as we commented on in the last quarter.

And finally, I'd like to talk about structural improvements in profitability. Project Flash, which you may recall us mentioning, involves digitizing our processes after we take an app. Now in some instances, Flash cuts the amount of time required to complete certain processing tasks by more than 50%. As of today, Flash is now in operation across roughly 16% of our production.

But by the third quarter, Flash should be up to 60%. So you should expect us to point to more efficiency gains in coming quarters. Now let's shift to volumes. For DTC, volumes were down 8% sequentially and locks were down 12%, which reflects the predictable effect of higher mortgage rates and also the return of seasonality.

After working intensely over the last two years, while at the same time dealing with the disruptions of the pandemic, many of our Originations team members finally took some time off this season to be with their families, which resulted in a more typical seasonal pattern for the fourth quarter. And candidly, we couldn't have been happier for that. I'd like to take a minute to recognize our Originations team members because over the last two years, you have done a magnificent job taking care of our customers and your contribution to the company's performance has been nothing short of amazing. In the correspondent channel, funding has dropped off more significantly and that was by design.

Specifically, fundings were down 19% and locks were down 39% sequentially. And this was the result of sticking to our pricing discipline in the face of extreme competition. What's interesting to us is at this point in the cycle, we're seeing better returns and bulk acquisitions than in correspondent. Now let's turn to Slide 11 and zeroing on some of the key performance metrics for Originations.

The correspondent channel continues to provide us with excellent exposure to the purchase market, with our purchase share at 57% in the quarter, outpacing MBA's estimate of 47% for the industry. This shows you that we have some strong originators as our clients. In terms of DTC, we're doing extremely well with cash-outs, which made up nearly 50% of DTC volumes this quarter. As I commented earlier, with home prices having risen so strongly over the last two years, we're seeing significant growth in the number of customers with equity, which bodes well for continuing cash-out volumes.

Recapture performance is also heading in the right direction. Refinance recapture rates increased from 40% to 43% in the quarter. And in January, the rate was 49%, as we continue to execute toward our important strategic recapture target of 60%. Achieving that target will drive stronger growth since we'll have fewer relationships to replace, and it will structurally improve our return on equity and cash flow generation.

By the way, we haven't talked with you before about purchase recapture, but this is also an area of strategic focus for us since it's another lever to drive higher customer retention. In this regard, we recently entered into a partnership with Realogy, which is the nation's largest realtor network, to provide our customers with access to Realogy agents to assist them with the purchase transaction. We'll provide you with an update on how this is working out later in the year. Turning to gain-on-sale margins in the upper right-hand chart.

For DTC, we're continuing to see slow but steady pressure, which is exactly what we'd expect at this point in the cycle. In the correspondent channel, we began to see a small improvement in January, which wasn't due to any change in competition, but simply shows the impact of our decision to scale back where pricing was unattractive. Turning to the outlook for the first quarter. This is clearly the point in the cycle where Originations could be very sensitive to small changes in interest rates, especially given that the industry is dealing with certain competitors who are desperate to sustain volume at almost any cost.

So while there are some uncertainties, we'd expect first quarter EBT for originations to be somewhere in the range of $150 million to $170 million based on fundings of $10 billion to $13 billion. Now if you turn to Slide 12, let's talk about growth in the Servicing portfolio where we have excellent momentum. Total UPB ended the quarter at $710 billion, which is up 6% sequentially and up 17% for the year. And we've talked a lot about the $1 trillion UPB target or more than 5 million customers, which is meant to signal our confidence in the scalability of our platform.

Growing to that level will provide us with a huge scale advantage over competitors and should also position us to generate positive operating leverage and structurally higher returns. As you can see from the chart on the left, the growth this quarter was driven by solid execution across all channels, led by strong acquisitions of $43 billion. As we ended fourth quarter, we had $17 billion in MSR deals that are pending. And so far in the first quarter, activity continues to be very brisk.

In fact, just last week, we reached an agreement on a $21 billion portfolio at attractive terms, which we expect to board in the beginning of the second quarter. In subservicing, we had some modest growth this quarter coming from clients who won small new pools. As Jay mentioned, we're optimistic about gaining market share in subservicing and are currently in discussions with several new clients. We'd remind you that we're the only major subservicer with a strong recapture capability, which is absolutely critical to the economics for MSR investors.

Now let's turn to Slide 13 and talk about servicing EBT. Pretax operating income was $41 million, thanks to strong EBO revenues of $91 million, and that was slightly higher than our previous guidance. The EBO reflects the fact that we accelerated some buyouts for certain pools that would have otherwise taken place in the first quarter. Now with forbearance programs winding down, the EBO opportunity is rapidly diminishing.

In the first quarter, we're only expecting EBO revenues of around $20 million. Operating costs were a good story in 2021, and we brought them down from 8.5 basis points of UPB to 7.4. And as we continue to grow the portfolio, we're very focused on capturing incremental efficiencies, which will result in further declines in this metric over time. Now let's turn to Slide 14 and review amortization and deposit income, which are two components of Servicing earnings, both of which should improve in a rising rate environment.

Amortization was $187 million in the fourth quarter, down from $204 million in the third quarter due to lower CPR speeds, which declined to 19.5%. A further reduction in CPR speeds will drive lower amortization expense, although I'd remind you that this benefit will be partly offset by the higher valuation on the MSR, which we marked up to 124 basis points at year-end. Now let's take a hypothetical example. Suppose CPRs had been 200 basis points lower in the fourth quarter.

In that case, amortization would have been $20 million lower in the quarter, which equates to a full year benefit of roughly $80 million. This example is based on the MSR already valued at 124 basis points. I commented earlier on a markup of at least $300 million in the first quarter based on where rates are today. That mark would push the valuation up to roughly 130 basis points, which you need to take into account in forecasting amortization going forward.

Now turning to interest income. We earned $42 million in the fourth quarter. Now this amount, our custodial deposits contributed very little on average balances of more than $14 billion. As Jay mentioned, with the Fed expected to tighten at least four times this year, we'd expect this will push up yields on deposits by 75 or 100 basis points by year-end.

And we'd expect those improvements to continue throughout 2023. Now looking ahead into the first quarter, we expect servicing EBT to be minimal, call it roughly breakeven. Not only will EBO revenues continue to decline, as I mentioned, but we'll also lose some interest income from holding those loans pending redelivery. But from this point, we expect servicing returns to improve consistently throughout the year as we benefit from lower amortization, higher deposit income and incremental revenues from portfolio growth, and we'd expect EBT to continue rising in 2023.

Now if you'll turn to Slide 15, let's talk about the Auction Exchange. As you know, we're very excited to see this platform finally start to ramp back up and generate revenues now that state and federal foreclosure moratoriums are ending. As Jay said, we continue to actively explore monetization options with the caveat that this is a very valuable business. So we're in no rush.

With the moratoriums now expired, we're pleased to see market activity starting to pick up, albeit at a relatively slow pace which was, in fact, somewhat slower than we had expected. This is probably a combination of operational issues at the local level, plus we're seeing servicers taking an ubercautious approach wanting to make sure their borrowers have been presented with every possible alternative, including modifications prior to moving forward with foreclosures, and that's exactly the right position to take. It's still early in the year and plenty of things can change, but I don't expect revenues to really hit their stride until some point in the third or even the fourth quarter, in which case the $50 million EBT that we mentioned previously could be somewhat lower. Nonetheless, regardless of how quickly or slowly the activity ramps up, we all know that eventually, the market will need to clear foreclosures, which is not only important for investors, but will also help bring some much-needed supply back to the housing market.

The chart on this slide shows the history of foreclosure sales in the U.S., which you can see we're running in the ballpark of 200,000 units in the last few years prior to the onset of the pandemic. And of course, those volumes reflect the strongest point in the credit cycle. Then, with the moratoriums, sales dropped to nearly zero. Now in the next couple of years, we think 200,000-plus is a reasonably conservative gauge of normalized levels.

Also, there's a backlog from the last two years, which still needs to be worked through. And this forecast assumes that the economic outlook remains rosy. If we see any real deterioration in the credit cycle, foreclosure activity could be much, much higher and Xome's revenue would be potentially through the roof. All right.

Let's turn to the balance sheet, which continues to be a very good story for us and talk about liquidity. We generated strong cash flow in the quarter with an estimated $171 million in steady state discretionary cash flow. And as a reminder, this is an illustrative metric that represents discretionary free cash flow above the level necessary to sustain the MSR asset at its current level, net of excess spread. At quarter end, unrestricted cash was $895 million and this, plus the undrawn capacity on our MSR lines, left us with $1.7 billion of available liquidity.

During the quarter, we did pay down those lines by $35 million, which took us back to our minimum contractual draw of $270 million. Now we would expect somewhat higher line utilization this year if MSR growth opportunities continue to materialize the way we're expecting. On the topic of the senior notes, we're very thoughtful about how we term out our maturities. Our most recent offering had a 10-year tenure, which leaves us with a liquidity runway at five years and no maturities until 2027.

Now I'm going to wrap up my comments on Slide 17 by talking about capital and leverage. As you know, we've been managing our capital to our ratio of tangible net worth to total assets of 15% or higher. Today, we're pleased to report that we achieved and surpassed that target with that ratio ending the quarter at 23%, up from 14.5% last quarter. So with that, I'll turn the call back over to Ken for Q&A.

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

Great. Thanks, Chris. And Josh, could we please now start the Q&A session?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Kevin Barker with Piper Sandler. You may proceed with your question.

Kevin Barker -- Piper Sandler -- Analyst

Good morning. Congrats on a good quarter, and thanks for all the information regarding the MSR and Sagent. So could you just clarify, with Sagent, the $225 million gain, is that because you're licensing the servicing? Or is that a gain because you now have an equity stake in the company? Could you clarify that?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

That's because of the equity stake in the company.

Kevin Barker -- Piper Sandler -- Analyst

OK. And so what would that value the company at this point with the $225 million?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

We're going to have about a 20% stake in the company. So the value is $1 billion -- roughly, $1.250 billion.

Kevin Barker -- Piper Sandler -- Analyst

OK. And so on a pro forma basis, with the roughly over $300 million mark in the MSR and the $225 million gain on -- with the servicing technology, that's an additional, what, about $5 in book value growth? Am I thinking about that correctly for the first quarter without earnings?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Actually, the $300 million, just to be a little bit more accurate. I just want to be a little conservative on that comment, but I'm looking -- I wanted to see what rates were doing this morning. It's nearly $400 million. So think about that $400 million -- hair under $400 million, $225 million plus decent earnings in the first quarter at our tax rate for 75 million shares, it's well north of a $50 tangible book value.

It's -- now lots of -- a lot can change, right? Rates have been very volatile, but we fully expect rates to be higher at the end of the quarter. So the mark may move around a little bit, but you're thinking about it the right way, Kevin.

Kevin Barker -- Piper Sandler -- Analyst

OK. So your book value is north of $50 on a pro forma basis, give or take, and then you have a 23% tangible net worth ratio, which is 8% above your 15% target. If I do the calculation that would imply you have about $1 billion of excess capital. Why not just take out a chunk of your shares today given that you are trading at a significant discount to tangible book value on a pro forma basis?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Well, if someone called and offered us a big chunk of shares at attractive prices, we'd do just that. You should expect us to be actively repurchasing our shares. We think they're very cheap. And you heard Jay say the board just authorized us to buy another $200 million worth.

If the shares remain this cheap, at this kind of discount, I'm sure the board would ask us to buy back more. So we see it exactly the same way you do. And by the way, I'd just mention, we talked a lot about growth in MSR. Our capital and liquidity is No.

1 priority is growing the book. I just mentioned the $21 billion pool that we came to agreement on. While we were sitting here, we just got confirmation of another nearly $50 billion pool that we actually currently subservice. We just got notification that we came to agreement on that.

So we are growing very rapidly at attractive prices exactly the way we said we would. We expect this to happen. And we've accumulated that capital to be able to continue to grow the business as long as we see investments at attractive prices.

Kevin Barker -- Piper Sandler -- Analyst

OK. Well, thank you for taking my questions, and I'll be back in the queue. Thanks.

Operator

And your next question comes from Doug Harter with Credit Suisse. You may proceed with your question.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just kind of following up on the book value comments. Just want to make sure or get clarity around the return on tangible equity guidance. If that incorporates kind of the significant gains in book value that you've kind of already seen in the first quarter?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

No. No. Returns on -- returns -- net GAAP returns will be much higher. What we're talking about is operating returns on tangible common equity.

And we expect those to be at the lower end of the range just because we do expect compression. We expect some volume to moderate in Originations. We expect some compression. Last quarter, we actually saw the margin grow, but we do expect it to come down over time.

And maybe we're being a little conservative there. And then in Servicing, as we said, this is a transition year. Even from the beginning of the year, we've seen signs that CPR is -- it's certainly down in January and the beginning of February. So we'll have a -- again, we said a breakeven quarter in the first quarter, but profitability is going to kick in, in Servicing in a big way.

And I expect to see that improvement -- start to see that improvement in the second quarter. So low end of the range this year on an operating basis, given the marks we're talking about and the gains, that's not factored into those numbers.

Doug Harter -- Credit Suisse -- Analyst

Sorry, Chris, I meant more, I guess, on the denominator, whether those gains are kind of factored into the denominator of that guidance.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Yes.

Doug Harter -- Credit Suisse -- Analyst

Given that your equity -- OK. Perfect. Perfect. And then I guess with the agreement with Sagent, is there kind of -- do you -- other than the gain on the equity stake, do you expect any cost saves from that? Or I guess, how should we think about kind of the ongoing impact of that beyond the equity stake?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Well, there's definitely some efficiencies, but in its first year, we will be providing transition services agreement throughout this year and into next year. So our operating costs will not really change much during that period of time. But as the -- the really attractive thing here is that Sagent is going to take our technology that we've developed over many years. Our visionary technology leader, Sridhar Sharma, has made sure that every line of code we developed in the company over the last six years has been cloud-native code.

And so if you think of our Servicing platform as completely cloud-native end-to-end with the exception of our core, the core, which is owned by Sagent is outdated and needs to be replaced. And Sagent, as part of this transaction is going to replace that with a cloud-native core and have the first end-to-end cloud-native platform. Now you may -- that may mean a lot to the financial analysts on the call. But I know your peers in technology will recognize that as a complete game changer.

And so yes, we will see more efficiencies down the road after that cloud-based core is integrated. And quite honestly, if Sagent does -- if Sagent's valuation does half, as well as we think it can, it will be worth multiples of what we're going to recognize next quarter.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you, Chris.

Operator

Thank you. Our next question comes from Giuliano Bologna with Compass Point. You may proceed with your question.

Giuliano Bologna -- Compass Point -- Analyst

First of all, congratulations on another successful quarter and congratulations on the Sagent deal. What I want to actually pick your brain about a little bit was on the MSR comment in terms of probably the potential mark-to-market. I was curious if you were thinking about the MSR and the offsetting portion on the excess spread side? Or is it just the MSR side that you were talking about with the 300, maybe potentially 400?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

No, it is a complete net impact to the company. We always do that net of excess spread.

Giuliano Bologna -- Compass Point -- Analyst

That makes sense. Then thinking about capital allocation. You referenced a couple of different pools. One, the $20 billion and another $50 billion pool of MSRs.

There's obviously a lot of -- that obviously consumes some capital. So that would be great to see. But as we look forward and if you do get markups plus more value for an equity stake, there is -- you're still going to be generating a significant amount of capital. I'm kind of curious about how you think about distributing that capital on the -- relative to capital generation? Because you're obviously building capital and based on my estimates with what you've said so far, you might still be growing capital this year, even if you were to buy back the $200 million and make the investment or make the pool acquisitions that you discussed.

Just curious how you're thinking about that.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Well, the growth we're talking about is pretty remarkable, and that does consume quite a bit of cash. And so there's a big investments for us. As we said, we will use a little more leverage and still maintain what we consider to be a rock-solid consumer balance sheet. And we are going to increase the buyback.

We'll buy back $250 million. We will be building capital. And -- but I'd remind you, our No. 1 priority is expanding the portfolio, generating long-term sustainable growth.

And as long as there are attractive opportunities to do that that's what we're going to do. Now if we get to a point where pricing changes and -- or the stock continues to trade at a discount to book, then we'll be more aggressive there. But at this point, I think our focus is on growth, profitable growth.

Giuliano Bologna -- Compass Point -- Analyst

That makes sense. And obviously, there's a lot of potential also with the exchange business. One of the things I was curious about, taking a slightly different approach is that obviously, you've seen recovery in MSR values, obviously, and there could continue to be a strong continued upside in the MSR mark. I'm curious about -- curious how you think about potentially hedging or increasing hedging going forward as values continue to rise to provide sensibility?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Yeah. Up till now, the only change in our historical policy, which we were totally unhedged is anything that is financed gets hedged because obviously, we don't want to be in a situation where there's a sudden change and we're exposed to any kind of capital cost. There'll be a point when MSR prices, we feel, are fully valued. We're not there yet.

But when that does happen, we'd expect to be more fully hedged, perhaps not completely, but more fully hedged than we are today. And as I just said, we will be using a modest amount of more leverage. So the hedge we have in place will get larger.

Jay Bray -- Chairman and Chief Executive Officer

But I think the -- yes, the point there is -- the good news is we have the team, the infrastructure, etc., in place today to kind of -- as we want to increase the hedge, we'll be able to do that without any additional resources, etc. So we're prepared to do that at the right time.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

And Giuliano, I just want to come back. First of all, it's nice to hear your voice. But when we talk about the discount in stock, it's not the discount to tangible book value necessarily, which as we just said, at current levels, would be north of $50, maybe almost $52. That doesn't include the value of the Auction Exchange.

And as you heard in my comments, the return to full profitability may be a little bit slower than we said, but that is an absolutely great business, a very valuable business and we recognize that. And I think investors are starting to recognize that. So when you think of our tangible book value, you've got to think of it as tangible book value plus X for Xome. I'll let you figure out what you think that business is worth, but it's worth a lot.

Giuliano Bologna -- Compass Point -- Analyst

Well, I completely agree with you, and I think about it the same exact way in terms of potential value for the REO business. Actually, Chris, you mentioned that, one thing I was curious about was I think last quarter, you said roughly $50 million in '22 and then about $150 million in '23. Last year, you made some comments about '22 on the call. I was curious if -- when you were discussing roughly $200,000 foreclosures per year or return into that ZIP code, if that would still put you somewhere in the range of the $150 million for -- that you originally kind of discussed for '23?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

It's approximate. And in this guidance, it's kind of hard to think out exactly how it's going to unfold. So the $50 million that we talked about was really -- and I think we made it clear it was all back-end loaded. We expected revenues to really start to kick up in the third quarter.

It may take the fourth quarter, but the $200,000 is just normal run rate prior to the pandemic. It's definitely going to be higher than that because there haven't been anything. Nothing has been foreclosed on -- or virtually nothing other than vacant properties. So it's definitely going to be a big surge.

That's our guess right now. We're in that range. And we'll know more as the year progresses, and we'll certainly talk about Xome a lot more. We're not necessarily going to wait to monetize Xome when it hits that surge.

It's just when we see normality return and that's when we think we'll get full value for the business.

Giuliano Bologna -- Compass Point -- Analyst

That's great. Then just one quick question and then I'll jump back in the queue. I'm curious if you know the number or the dollar amount of the EBOs that are consolidated for the shares or the loans sort of repurchased as of the fourth quarter?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

I don't know the number off the top of my head. We can get that.

Jay Bray -- Chairman and Chief Executive Officer

I do. Giuliano, we ended the quarter at $1.5 billion. That's down from $2.7 billion from last quarter. 

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Yes. Thank you.

Giuliano Bologna -- Compass Point -- Analyst

Perfect. All right. I really appreciate it. I've taken up a lot of time and I'll jump back in the queue.

Congratulations.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Thank you.

Jay Bray -- Chairman and Chief Executive Officer

Thank you.

Operator

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

You may proceed with your question.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Good morning. It's very official sounding. Let me add my congrats as well. What a wonderful quarter.

One stupid question. In looking at these fair value marks, I'm assuming that you don't have to tax them for GAAP? Or am I wrong on that?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

No, you have to tax them for GAAP. Obviously, we're not paying cash taxes, but -- yeah, but the TBV number I was just citing and projecting is fully taxed.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Yeah, yeah. OK. No, that's perfect. Secondly, with the Sagent, you've gone down a lot of technology paths.

You've created a lot of value and then sold the assets. With Sagent, is this -- does this represent a nice investment opportunity that might be a distraction to the basic business? Or are there aspects of the deal with Sagent and the servicing technology contracts you're going to create with other players, that actually feeds into your basic financial goals for the mortgage company?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

It's definitely not going to be a distraction. It will be a continuation because the team that we have managing our system today will largely transition over to Sagent. We view it as a continuity of what we're doing. And Sridhar Sharma who has conceived and built and leads this team will stay with the company, but he will be a strategic advisor for technology to the Sagent board.

So I think we will have our cake and eat it too. We're going to be partnered with a terrific company we have a lot of confidence in. We're going to benefit from all the investments they're going to make. And we're going to be able to provide influence on the direction of the company.

I think there'll be very strong influence. Over the last few months, we formed very tight relationships with the leadership team, strong friendships. And I think this is going to be a great way for us to benefit. We could have taken a check.

And we think this is a great investment that has tremendous amount of potential.

Jay Bray -- Chairman and Chief Executive Officer

Henry, from a day-to-day standpoint, it's no impact, right, on the business. So I don't view it as a distraction at all. I mean, again Sridhar --

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Does it bring something -- does it add to your ability to attract new servicing? Or --

Jay Bray -- Chairman and Chief Executive Officer

I mean, I think it's probably not in a material way. Over time, as the platform grows, I think naturally, transfers can be easier back and forth, etc. So over time, yes, it could have an impact. But I think not during this transition period, is the way I would think about it.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

One day, I asked Black Knight a question, and I mentioned something about the duopoly in servicing. And they said, who else? And we've done a lot of looking and never really been able to uncover a major partner -- a major party in the servicing business. How do you see yourself stacking up against Black Knight once this product is fully developed over the next 24 months?

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Hey, look, Black Knight is a great company. Anthony and Joe are first-class executives, and we have the utmost respect for them. But every mortgage company wants a cloud-based solution. Every bank that services the Xome portfolio.

Headline in American Banker the other day was all banks are marching to the cloud for obvious reasons. I mean, it provides so many efficiencies to you. Having the first truly native cloud-based platform is a game changer. So I don't want to say anything about our good friends at Black Knight.

But for Sagent, Sagent is creating something brand-new that everyone's wanted, and I would expect it's going to be a major disruption.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Yeah. I mean, that's your vision, and I was asking really if that -- do you see yourself stepping right into that competitive fray and offering a product to other people? We hear the same thing. Everybody loves Black Knight, but they want more.

Jay Bray -- Chairman and Chief Executive Officer

Yeah, I think it's --

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

I'm sorry?

Jay Bray -- Chairman and Chief Executive Officer

Yes. Well, I just think it's a natural evolution, right? Sagent is -- has customers today. And they are growing that customer base. And I think to Chris' point, as they add more capabilities, take the platform completely to the cloud, it's really exciting.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Is this a servicing platform and ultimately an origination platform? Or --

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

It's just the servicing platform. And since it's our servicing platform, I tell you it's a great platform.

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

Listen, thank you. Great quarter and we really appreciate all the clarity and guidance around the changes in the MSR value. So thanks again.

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Thank you, Henry.

Jay Bray -- Chairman and Chief Executive Officer

Thank you, Henry.

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

Josh, thank you very much. We're going to go ahead and end the call now.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jay Bray for any further remarks.

Jay Bray -- Chairman and Chief Executive Officer

Just thank you, guys, for joining this morning, and we look forward to continued dialogue. Have a great day. Thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

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

Jay Bray -- Chairman and Chief Executive Officer

Chris Marshall -- Vice Chairman, President, and Chief Financial Officer

Kevin Barker -- Piper Sandler -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Giuliano Bologna -- Compass Point -- Analyst

Henry J. Coffey Jr. -- Wedbush Securities -- Analyst

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