Mr. Cooper Group Inc. (COOP) Q1 2022 Earnings Call Transcript

Mr. Cooper Group Inc. (COOP -3.10%)
Q1 2022 Earnings Call
Apr 28, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to Mr. Cooper Group first quarter 2022 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 first-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 and president; and Jaime Gow, executive vice president and 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. As we all know, the first quarter was extremely volatile with the conflict and humanitarian crisis in Ukraine shocking the markets, further supply chain disruptions, leading to headaches for many industries, accelerating inflation, forcing the Fed into action, and the sharpest increase in mortgage rates in many years, if not decades. And really all of this has pushed the originations industry into a period of severe retrenchment. But for Mr.

Cooper, this kind of environment demonstrates the benefits of our balanced business model, which by design includes a much higher contribution from servicing than most of our peers. The key things for us in this environment are, first, very robust growth and book value; second, a sharp ramp in servicing profitability in the coming quarters; and third, the monetization process for Xome. We'll talk more about these themes in a moment. First, though, let's review the quarter's highlights.

For the first quarter of 2022, we generated very, very strong net income of $658 million, and as a result, tangible book value increased to $52.01 per share, which is an impressive 62% year-over-year gain. Net income included operating results which were in line with our guidance; the gain from the Sagent transaction, which we closed in March; and an MSR mark of $552 million, which was higher than what we previously guided to as interest rates continued to rise through quarter end. On a GAAP basis, our return on tangible equity was 74%. On an operating basis, the return was 8%, which is below the target range of 12% to 20%, which we guided you to expect in most environments.

The next couple of quarters are a transitional environment for us. We expect our returns to trough in the second quarter, after which we're projecting a sharp ramp in servicing profitability, driven primarily by higher interest rates, which should carry us by fourth quarter back into our target ROTCE range. Zeroing in on the segments, operating earnings were in line with our guidance with servicing contributing $7 million in pre-tax income and originations contributing $157 million. What was exciting to us was the growth that we achieved as we took the portfolio to $796 billion, which was up 12% sequentially and 27% year over year.

Frankly, we've made faster progress toward our strategic goals than even I anticipated. What you're seeing is that we can be extremely nimble when the opportunity presents itself because our team knows the market inside and out and our operations and technology are completely unmatched. This quarter's growth sets the stage for strong recurring annuity like cash flow, which in the current rate environment will last for years and years to come. Turning to capital management.

We repurchased 700,000 shares for $35 million during the quarter. With the recent sell-off in our stock price, we've shifted our focus from MSR acquisitions to stock repurchase, which is exactly what you would expect us to do as stewards of your capital. And we'll talk more about this in a moment. The balance sheet continues to be a good story.

At March 31, our capital ratio was 27% of assets and our cash and liquidity remained strong. Our stakeholders should feel confident in Mr. Cooper's ability to serve our 3.9 million customers even in a volatile environment. Now let's turn to Slide 4 and let's talk about the outlook for the rest of 2022.

To start with, our servicing portfolio puts us in position to benefit from higher interest rates, thanks to the dramatically lower amortization. We believe servicing profitability bottoming in the first quarter, and by the end of the year, we should be generating at least $100 million per quarter in pre-tax income from this segment. This projection primarily reflects the impact of higher interest rates, which obviously lie outside of our control. But what we can control is how we run the platform, and in that regard, we're extremely focused on continuing to lower our costs and deliver an even better customer experience with the goal of driving higher returns in 2023 and beyond.

Turning to originations. You'll see us operating with consistent profitability, albeit at lower levels, as this is clearly not the time to chase volume or market share. We've already taken several steps to adjust our capacity, and you'll see us doing more. Having said that, we have hundreds of thousands of customers with equity in their homes, and we can help with cash out refis, which is a product we're very experienced with.

And we have strategic initiatives underway to drive efficiencies, including Project Flash, which will help us sustain our margins. Now let's talk about Xome. As you recall, back in February, we were commenting that activity got off to a little bit of a slower start than we'd expected. As servicers, we're moving forward cautiously on foreclosures, wanting to make sure their borrowers had every possible opportunity to avoid it.

But there's no mistaking the growing backlog in REO. In the last two months, we've seen much higher inflows and in March, our inventories hit an all-time high. We continue to project revenues ramping up in the back half of the year, which supports a very strong outlook for '23. And in a moment, Chris will give you an update on our strategic thinking for Xome.

Finally, I want to return to the theme of capital allocation. Over the next few quarters, we expect to acquire MSRs at a more measured pace. This will give us the chance to digest recent purchases, further strengthen our cash position and let sellers expectations cool after the recent run-up in rates. With our stock trading at a discount to book value, we're looking for opportunities to buy back more shares, while at the same time managing our capital and liquidity conservatively.

And with that, I really like to thank every single team member at Mr. Cooper for your hard work, which produced such exceptional results, and for your dedication to our customers. Now Chris will take you through more details on originations, servicing, and Xome. And following Chris, Jamie will take you through the financials.

Last week, I'm excited to say, we promoted Jamie to executive vice president and CFO, and I couldn't be more pleased with the experience and leadership he's brought to the company. Over the last three years, he's really built a world-class team of finance, accounting and tax professionals, significantly improved our processes and controls and managed to sell of the reverse portfolio to a very successful outcome. Jamie's promotion will allow Chris in his role as president to shift his full focus to the business units. And with that, I'll turn the call over Chris.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Thanks, Jay. And I'll add my congratulations to Jamie. I've worked very closely with Jamie for well over a decade now. And his promotion is part of a transition that began last June when Jay asked me to directly manage our business units, actually, with a focus on preparing them for the environment we're now seeing unfold.

So over the last year, I've handed more and more of the day-to-day CFO responsibilities to Jamie, and his performance has been consistently excellent. So I'm confident that you're going to see a very smooth, no surprise transition. So with that, let's turn to Slide 5 and start by reviewing originations, which, as Jay said, is significantly retrenching at this point in the cycle for us and of course for the rest of the industry. Now just to give you some perspective, with mortgage rates currently hovering around 5%, the percentage of customers in the marketplace who are in the money for a rate term refinance would now be in the low single digits, which makes this as difficult a rate term refinance environment that we haven't seen since the mid-1990s.

So against that backdrop, we're very pleased with our performance in the quarter, which included EBT of $157 million and funded volume of $11.6 billion, which was right in line with our guidance. However, given the magnitude of the move in rates over the last 90 days, I guide you to expect a significantly lower run rate from originations for the rest of 2022. Specifically, we're now projecting quarterly EBT in the range of $65 to $85 million on funded volume of around $7 to $8 billion per quarter. The main driver of this lower run rate is obviously the steep reduction in rate term refi volume as well as gradual compression in margin.

Now that said and given the historic home price appreciation that's occurred in most of the U.S., we've had a huge surge in the number of customers with significant equity in their homes, which allows them opportunities to restructure their personal balance sheets and materially improve their cash flow. Given high home prices and low inventories, we'd expect to see large numbers of our customers use cash-out refis to expand and renovate their homes. And that is in fact exactly what we're seeing, with cash out already up to 64% of our total production in March. Keep in mind that while mortgage rates of 5% to 6% may seem quite high compared to what's been available in the marketplace over the last two years, in a historical context, rates are really hovering around the long-term average.

And I'd remind you that given the tax advantages of mortgage debt, the after-tax borrowing cost we can provide to our customers is very low compared to every other source of consumer debt. Now our team is excellent and has extensive experience with cash-out products and is well versed in the needs-based selling approach that we conduct using our proprietary sales desk technology. So the good news is that although volumes are down, our cost to market and originate are very low compared to the industry, and DTC will continue to originate loans with strong margin and positive cash flow. Now turning to correspondent.

As you can see from the numbers on this page, we pulled back even further this quarter. At this point in the cycle, the correspondent market is suffering from extreme pricing pressure, and we're sticking to our discipline and are prepared to be patient until margins improve. Longer term, we remain very committed to the channel and especially to our clients, and we expect to be back as a major force once margins return to acceptable levels. Now turning to the margin, which we report net of expenses.

You'll notice an increase in the quarter by 12 basis points to 253 basis points overall. But that variance was solely due to our mix shift into DTC, which was 67% of total volumes, up from 52% in the fourth quarter. Now if you'll turn to Slide 6, let's review some performance metrics. You can see here, as I mentioned a moment ago, that cashouts were up to 64% of the mix in March.

And of course, we fully expect that ratio to continue rising. Refinance recapture rates increased from 43% to 50%, which was good. And in March, the rate was actually up to 54% as we continue to execute toward our strategic target of 60% or higher. This goal remains extremely important to the team because every percentage point of improvement makes us a stronger bidder for portfolios and a stronger sub-servicer, which contributes to structurally higher returns for the company.

Turning to gain-on-sale margins in the upper right chart. For DTC, we're continuing to see a slow, steady decline toward normalized levels, but without the intense competition and dramatic margin pressure that you've been seeing in the retail and wholesale channels, where lenders are fighting over a very, very small pool of new customers. On a final note, given lower volumes, rationalizing capacity is an unavoidable theme for everyone in originations. Now we've been very disciplined in managing capacity.

But in the second quarter, you'll see us take a charge for staff reductions related to our lower volumes. Having made that point, we're at the same time continuing to invest in our originations platform. For example, as you heard last quarter, we're making extremely good progress with Project Flash, which further automates our middle office processes and continues to reduce our cost to originate. Now let's turn to Slide 7 and talk about the servicing portfolio, where the story is very strong growth this quarter and a ramp to sharply higher profitability for the rest of the year.

Let's start with growth. We had a fantastic quarter with both MSR acquisitions and subservicing. In total, the portfolio ended the quarter at $796 billion, which was up 12% sequentially and 27% from a year ago. That's 3.9 million customers who we'll be serving for many years to come.

And we are laser-focused on doing an exceptional job for them and turning them into Mr. Cooper customers for life. I think it was about a year ago that we shared a thesis with you that higher rates would force originators back into the market selling the MSRs which they've been accumulating since the pandemic started, and that's turned out to be pretty accurate. With the sharp rise in rates this year, we saw a deluge of products hitting the market with very attractive pricing.

During the quarter, we acquired MSRs with $81 billion in UPB, which should deliver an after-tax levered IRR of approximately 17%, which is obviously very supportive of our long-term corporate return targets. Bear in mind, you'll see these returns show up over time both in the servicing segment in terms of higher levels of servicing fees and EBT, which at current rates will extend for many years to come, and also to a lesser extent in originations through incremental recapture opportunities over time. This was also a great quarter for subservicing, where we acquired new clients and we were awarded by existing clients with large blocks of business. These clients are choosing Mr.

Cooper because they're confident in our exceptional customer service, recapture capabilities, compliance, default management, operational and IT controls as well as our strong and sound balance sheet. As we commented last quarter, we acquired a large portfolio from an existing subservicing client which exited the business of holding MSRs. Now to give you a sense of our momentum, excluding that one transaction, during the first quarter we grew our subservicing book by 16%. By the way, that transaction pushed our portfolio a little bit above our targeted mix of 50-50 owned and subserviced.

With strong growth prospects in both businesses, we'd expect to hover in this range of plus or minus 50% for the foreseeable future. Now let's turn to Slide 8 and talk about servicing income. We guided you to expect breakeven results this quarter, and we did slightly better than that with pre-tax operating income of $7 million. But from this point on, we expect servicing income to improve significantly quarter by quarter throughout the rest of 2022 as we benefit from lower amortization and higher yields.

By the fourth quarter, we're projecting a quarterly run rate of $100 million to $120 million per quarter in EBT. Now that forecast is based on the current yield curve, which is factoring in roughly 6 additional Fed rate hikes. Now that scenario should push CPRs down in Q4 to about 8%, which incidentally is about where they were when they bought them in 2018. And normally, we don't give you such specific guidance.

But with the market so volatile right now, we thought it would be helpful to provide you with just a little extra transparency. Now let's turn to Slide 9 to flesh out the story on amortization, which was $201 million in the first quarter, up from $187 million in Q4 due to portfolio growth as well as higher valuation, partially offset by lower CPRs. Going forward and based on the current rate scenario, we'd expect amortization to decline to around $140 million by the fourth quarter, saving nearly $60 million a quarter or $240 million a year. And by the way, this forecast assumes continued growth in our MSR balances through year-end, but at a more modest single-digit pace, although it does not reflect any additional markup to the MSR from higher interest rates.

Now as I'm sure you're tracking them, rates have continued to move up this quarter. So there's also a sensitivity analysis on this slide that you can refer to if you want to see what that may mean or if you have a different view on the outlook for CPRs. Higher interest income is also factored in into our servicing EBT forecast. We ended the first quarter with $12 billion in custodial deposits, which will decline gradually to approximately $10 billion by the fourth quarter due to lower prepayment speeds.

And incremental yields will move up as the Fed raises rates. Bear in mind that the benefit will be partially offset by higher expense on advance and MSR warehouse lines. Now let's switch gears and talk about Xome, which has the potential to be a major contributor to our earnings and book value. If you turn to Slide 10, let's start with the market backdrop.

As you can see from the chart on the left, 90-day delinquencies in the FHA market, which is our main source of product for the exchange, are still quite elevated at over 5% as forbearance programs are winding down. Foreclosure inventories at year-end 2021 were only 0.6% or half the normal level prior to the pandemic. So even without considering the foreclosure backlog of the last two years, we'd expect inventories to roughly double from here just to reach normal levels. Now if you shift your attention to the chart on the right, what we're showing you is a sizable increase in inflows to Xome's auction exchange, which took us up to a record inventory level of 18,200 units.

Now this is partly the foreclosure market coming back to life, but it's also the fact that we're gaining market share. During the quarter, we signed up new clients and we significantly expanded market share with existing clients, who happen to be major players in the industry. We estimate that our FHA market share is currently around 30%, and we believe we have a clear line of sight to reaching 40% by year-end. The outlook for the auction exchange is excellent.

After losing a small amount of money for the past two years due to the moratorium, we're projecting the exchange breaking even in the second quarter. And as we exit 2022 and enter 2023, we'd look for a quarterly EBT run rate that would equate to full year 2023 earnings of $120 million or higher. Now as a caveat, back in February, we reported on a slower start to the year than we've been expecting as mortgage servicers were taking a very cautious approach to restarting their foreclosures because they wanted to make sure borrowers have every opportunity to modify their loans. Now we may see this caution persist, which could delay our revenue ramp.

But sooner or later, foreclosure inventory has to be cleared. And not to mention, if the economy were to weaken, foreclosure volumes would be substantially higher for an extended period of time. As we think about the potential of Xome, we are not wavering in our commitment to our investors to realize the full value for this business. We regard the auction exchange as a world-class, fully digital business with huge revenue potential, and none of that is reflected in our stock price.

We're currently having initial conversations with bankers that advise us on monetization alternatives, and I look forward to giving you further updates next quarter. I'll now turn it over to Jaime, who will take you through the financials.

Jaime Gow -- Executive Vice President and Chief Financial Officer

Thanks, Chris, and good morning, everyone. If you turn to Slide 11, I'll start with a brief recap of the income statement and some observations on our outlook. To summarize, net income was $658 million, which included a positive $552 million MSR mark, $223 million gain from the Sagent transaction, $96 million in operating earnings, and adjustments of $3 million, which related to severance charges. I'd also point out that the weighted average diluted share count declined from 77.4 million to 76.6 million shares, and we ended the quarter at 73.9 million shares outstanding, reflecting the impact of stock repurchases.

Our repurchase authorization now stands at 217 million. As Jay mentioned, we expect earnings to drop in the second quarter as our originations volumes ratchet down quickly, while servicing will take until the fourth quarter to reach the $100 million level that Chris mentioned a moment ago. Following the second quarter, we're projecting profitability rebounding sharply driven by higher contributions from servicing. Based on the current interest rate outlook, we'd expect to exit the fourth quarter back within our target range of 12% to 20% ROTCE.

Let's turn to Slide 12 and talk about tangible book value per share, which we believe is an important valuation measure for the analyst and investor community. Thanks to strong net income, TBV increased to $52.01 per share, up 62% year over year. The chart on the right provides you with that walk. The growth was driven primarily by strong operating income and positive MSR marks, which demonstrates the power of our balanced business model.

In addition, over the last year, we opportunistically repurchased 13.1 million shares or $487 million, which added $2.24 per share to TBV. I'd like to point out that our very strong net income this quarter utilized $197 million of our deferred tax asset, bringing the balance down to $794 million. The DTA is now down to 21% of TBV, which is half the levels of a year ago. The DTA is still an important asset to us as it drives sustainable cash flow by limiting our federal tax payments, and it will continue to do so for some years to come.

But it is no longer a material component of our equity base, which is a positive for our valuation. Now let's turn to Slide 13 and discuss the MSR. During the quarter, mortgage rates rose 156 basis points, leading to a decrease in the lifetime CPR assumption. Additionally, swap rates increased 162 basis points, which drove higher expectations for custodial deposit income.

Together, these rate moves resulted in a positive mark of $552 million, which brought the value of the MSR up 22 basis points to 146 basis points of UPB. The chart on the right shows you an updated view of the rate sensitivity of our position, which is shown net of excess spread and hedges. For example, in a parallel 50 basis point rate shock scenario, we would expect to record a net mark of $175 million. In terms of hedging, we have increased the hedging ratio from 10% of the interest rate risk in our portfolio to approximately 25% since the upside potential for higher rates is starting to level off, leaving us with a greater relative exposure to downward shocks.

In making this decision, we are focusing on the benefits of preserving TBV and capital against unexpected shocks, but we also factor in the capabilities of our DTC platform to recover marks through higher volumes and margin and the liquidity cost of derivative instruments. Turning to Slide 14. Let's review the company's liquidity. During the quarter, we generated strong cash flow with $86 million in steady-state discretionary cash flow, which included contributions from both servicing and originations.

We expect cash flow to drop in the second quarter and then it should rebound in the second half of the year, driven by increasing profitability from our servicing segment. Given the outlook for reduced volumes, the originations segment will make a smaller contribution to overall cash, although we expect our DTC originations to remain cash flow positive. You will notice, we've increased borrowings on our MSR lines to $800 million, which we used this quarter to fund MSR acquisitions. As we shared before, we regard MSR financing as a source of working capital rather than permanent capital.

So you should expect us to pay down those lines to lower levels as the year progresses. At quarter end, unrestricted cash was $579 million. This plus the available undrawn capacity under warehouse lines left us with $1.3 billion of liquidity. This was down from $2.1 billion in the prior quarter as we deployed liquidity to acquire MSRs.

However, this is still a very robust level for us and well above regulatory requirements. Finally, as a reminder, we have a five-year liquidity runway with no maturities until 2027. I'm going to wrap up my comments on Slide 15 by talking about capital. Our capital ratio at quarter end as measured by tangible net worth to assets was 26.8%, up from 23% last quarter and nearly double our target of 15% plus.

We understand the fact that investors measure our capital using a variety of metrics, so let me speak to a couple of these. Excluding deferred tax assets and EBOs, our capital ratio was 24.6% at quarter end, reflecting both strong capital generation in the quarter and the utilization of the DTA. We regard this as a very healthy ratio. A second ratio which is important to investors is the ratio of debt to tangible net worth, which, as you can see, remained comfortably and sustainably below 1x.

We're sharing these ratios because we believe a strong balance sheet is a defining attribute of a market leader, and we think these metrics put us on the path to rating upgrades, strong performing senior notes and a solid long-term profitability. And with that, I'll turn the call back to Ken for Q&A.

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

Thanks very much, Jamie. And now I'm going to ask Shannon if you could please start the Q&A session.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Kevin Barker with Piper Sandler. Your line is open.

Kevin Barker -- Piper Sandler -- Analyst

Good afternoon. Thanks for taking my questions. I just wanted to follow up on the capital side. It seems like you have an exorbitant amount of capital relative to your needs.

Could you talk about how much stock you bought back so far this quarter? And what your plans are given the MSR market is not as attractive as it was relative to stock buybacks given your comments you made during the call?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. I'm not sure I'd say exorbitant, but we do have a lot of capital. We intend to continue growing through MSR purchases, but we'll be more selective right now, because you're right, prices have exceeded what we thought they'd be at this point. And quite frankly, they're sharply higher from where they were when we did a significant amount of purchases last quarter.

With regard to stock buybacks, we've been in blackout through today. So we haven't bought back any shares this quarter. But we certainly will be back in the market. We think the stock is trading well below the appropriate value.

And so we will -- we'll continue buying back shares for the foreseeable future.

Jaime Gow -- Executive Vice President and Chief Financial Officer

And if you look, Kevin, really -- overall, we have, I think, over $200 million in authorization and you'd expect just to buy back at least $50 million per quarter and potentially more is the way I would think about it. And the board is certainly supportive of share buybacks, especially at this level.

Kevin Barker -- Piper Sandler -- Analyst

So could you quantify what -- the amount of excess capital you currently have on your balance sheet that could be deployed whether it's to MSR purchases or buybacks?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think you should -- we ended the quarter with tangible net worth assets at 27%. We said our minimum target is 15%. So you could say you could take 12% of that. I'm not sure I categorize it as excess, but we certainly intend to stay at a minimum of 15% or higher.

But that's a lot of capital to do both MSR purchases and an awful lot of stock repurchases. So we bought back $35 million of shares in the first quarter. You should expect us to buy more of that in the second quarter.

Operator

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

Giuliano Bologna -- Compass Point -- Analyst

One thing I was curious about was -- you, obviously, provided some commentary about hedging on the MSR portfolio -- on the hedging MSR portfolio going from 10% to 25%. I'm curious, when you think about hedging, especially as we get to have kind of -- as you guys had referred, kind of gone a little faster from a recovery perspective. Is there a sense around where you might normalize that? Or if you might ramp that up throughout the year if MSR values continue to slide a little bit higher?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No -- I wouldn't give you a target, but we hedge primarily for liquidity risk. Of course, we're very mindful of MSR value. And so if MSR value were to continue to grow unimpeded, you would expect us to hedge more over time. But we're primarily looking at liquidity risk.

And so we started out hedging to really cover the amount of MSR we had as collateral against our MSR borrowings. So I wouldn't say any more than that. I wouldn't be surprised if our overall profile expanded somewhat in the quarter. But there's no specific target that we're trying to get to.

Giuliano Bologna -- Compass Point -- Analyst

Makes sense. And then when I think about the capital return and share repurchases -- obviously, you're trading at discount to what tangible book value is now. But what I'm curious about is when you think about tangible book value on a forward basis -- I think -- what -- you've, obviously, said that in the past is that it doesn't accurately reflect the value of the auction exchange platform, which I agree with you there. And I guess it's more of my estimates than what you guys -- management team here has said.

But there's obviously potential for book value to grow materially over the next couple of years, if you were to monetize the auction exchange platform. When you think about buybacks, do you take that into consideration from that kind of a medium-term perspective because there would be enormous accretion from continuing to buy back stock in and around the levels and even higher on a forward basis?

Chris Marshall -- Vice Chairman and Chief Financial Officer

The simple answer is, yes, we do. We certainly do. We think the business is extremely valuable and it should be more fully reflected in the stock price. But if you look back over the last couple of years, we've had an enormous appetite for our own shares, and that's one of the primary reasons.

So you should expect us, again, to be active in the market, buying back our shares at these levels.

Giuliano Bologna -- Compass Point -- Analyst

Makes sense. And then one last question that -- and it's a little more strategic looking at the overall market. Would it ever make sense to consider acquisitions of other mortgage companies out there? They are handful trading at very large discounts to their book value in the public markets, and they are also -- I'm assuming that there are similar opportunities in the private markets. Would it ever make sense to take that approach as a way of acquiring MSRs and assets rather than simply looking at MSR portfolios?

Jay Bray -- Chairman and Chief Executive Officer

Well, look, at the end of the day, you'd never say never. And we're certainly seeing a lot more activity there. But as we said before, it would have to be accretive and we'd have to -- it would have to be a platform that has something we don't have today. So I think we would be very selective in looking at that and very careful about the cultural fit as well as the integration risk.

So -- if we think it's a really accretive opportunity, we'll spend time on it, I think is a simple way to think about it.

Operator

Our next question comes from Eric Hagen with BTIG. Your line is open.

Eric Hagen -- BTIG -- Analyst

The disclosure around sensitivity of the mark-to-market for the MSR is definitely helpful in terms of, I think, gauging the upside that could be remaining. I'm curious how closely connected the marks might be to a stronger bid for MSR in the marketplace? Or would you really say that the upside -- or the potential upside remaining is essentially only tied to improving metrics at the loan level?

Chris Marshall -- Vice Chairman and Chief Financial Officer

The upside or at least the sensitivity that we have in those disclosures is totally driven by our models at the loan level, if that's -- if I'm hearing your question correctly.

Eric Hagen -- BTIG -- Analyst

Right. But if the gauge for MSR --

Jaime Gow -- Executive Vice President and Chief Financial Officer

Yes. The mark process doesn't really -- to Chris' point, it's model-driven, and it's obviously validated by third parties just like most processes or most companies like us. It's not driven really by MSR prices in the market. That doesn't really determine how much upside there is, if that answers your question.

Eric Hagen -- BTIG -- Analyst

Yes, it does. That's helpful. And then just in the MSR market in general, understood that you guys might be bidding less frequently going forward. But how would you describe the kind of conditions to acquire MSR in the bulk market versus the flow channel right now? And any kind of color around conditions in that market would be helpful, in both markets?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, I want to be careful because we're a very big buyer of MSR, and we have been for 15 years. I'm sure we bought more MSR than anybody else in the industry. And over time, we will continue to do that. We've been clear about our goal to grow the servicing book to $1 trillion or more.

And so at $800 billion, while we have grown significantly, we still have a lot of growth ahead of us. When we say we're going to be more selective, we're talking about over the next couple of months we expect to be more selective. And right now, volume has dropped off a little bit. There was a lot more in the market in the first quarter.

So that's one thing I want to make clear. The second thing is we're very active in correspondent co-issue and in bulk. And I'd say while prices may have traded up, returns are better than they were 6 months ago. So there is still -- if you look at some of the sellers in the market, they are -- and we made these comments earlier.

These are folks who had been able to sit on their servicing because they were operating with very wide margins and were cash flow positive. Today, that's not the case. Margins have shrunk quite a bit in the correspondent and wholesale channels. And so people are actively selling.

And that's causing -- while prices are up, returns are up as well.

Jay Bray -- Chairman and Chief Executive Officer

Yes, I would say at this moment in time, flows more attractive than bulk. But I personally expect a lot of product to come to market based on what Chris just said. And then you will have originators that will have to sell.

Operator

Our next question comes from Mark DeVries, Barclays. Your line is open.

Mark DeVries -- Barclays -- Analyst

I had a question about the outlook for the gain- on-sale margin. It looks like in both the direct-to-consumer and correspondent, it's holding out quite well, maybe down marginally so far in April. Do you have enough room to kind of take out expenses that you can keep those margins fairly level here? Or are there going to be some operating leverage issues if volumes continue to soften?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, there's a couple of things that go into that. Margins will come down over time. We've been saying that for several quarters, and we expect them to. But what you're seeing is volume dropping off more significantly in correspondent, where margins are smaller.

We will protect the margin to some degree. We are reducing expenses. We have been consistently now for three quarters. But we still think there will be a gradual decline in margin.

The one thing I would point out in our business is we can control that a little bit more because we're dealing with -- in the originations channel -- in the DTC channel at least with our own customers. So the margin is -- we're able to pace it a little bit more. But nonetheless, we do expect it to return to more normalized levels over the next three or four quarters.

Jay Bray -- Chairman and Chief Executive Officer

Which in the direct-to-consumer is still very strong. And -- but to Chris' point, given it's focused on our portfolio, we don't have significant marketing expenses, and we are actively taking capacity out now.

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'll give you one example just to elaborate there. We've talked a lot about Project Flash, and this is a program where we are automating a lot of our middle office. We started this about 4 quarters ago, about a year ago. By the end of this year, I'd say 60% to 70% of all of our originations will run through Flash.

And by the middle of next year, 100% of it will. So that -- we'll talk more about Flash over time. It's a proprietary technology, but that is reducing our middle office expense by half or more.

Mark DeVries -- Barclays -- Analyst

OK. Got it. And next, I had some questions about activity in Xome. Sorry if I missed this in your prepared comments.

But what drove the big Q-over-Q jump in the inflows? Is that just borrowers coming out of forbearance, unable to kind of modify their loans or get current. And did you have some pretty meaningful liquidation activity in the quarter? Because it looks like based on kind of the graph that inventory didn't move up that much, particularly relative to the very big inflows that you saw.

Chris Marshall -- Vice Chairman and Chief Financial Officer

The inflows are not tied to individual customers. The inflows are coming from our clients. So the ramp-up in inflows is a reflection of our market share growing significantly. Before the pandemic, we were in the high teens with line of sight to 20% or low 20s.

But today, we're at 30% and we've got line of sight to 40%. So what you're seeing is a shift in allocations from some of the biggest servicers in the country. We're winning more business. And if you look at Xome, compared to the other players in the market and even the market leader, all the performance metrics that any client would look at indicate that Xome is as good or better than any other platform.

So it's a great business, performance is outstanding, and we've been very effective in selling the platform.

Jaime Gow -- Executive Vice President and Chief Financial Officer

Yes, I mean, it's expected, right? The moratorium is lifted. You're going to see more activity there. We said it was slower than we originally had forecasted. But it's coming.

And it was a strong -- a very strong quarter from an inflow standpoint, to Chris' point, given our market share growth and just with overall more active foreclosure activity.

Mark DeVries -- Barclays -- Analyst

Got it. And then just one last question on the point about kind of expectations within Xome for the -- that foreclosure level to kind of get back -- maybe doubling from here to get back to more of a -- more normal level. Just based on what you're seeing with your own customers -- and I think one of the things they have going for them even if they're going to struggle to make payments on their mortgage out of forbearance is that they're sitting on a significant amount of equity given all the home price appreciation. And so are you seeing borrowers, even if they can't really modify and get current, who are able to just sell their home and capture equity as opposed to go to foreclosure?

Chris Marshall -- Vice Chairman and Chief Financial Officer

That's certainly a factor. But I think our expectation for levels to double would be for overall foreclosures to go back to pre-pandemic levels that were the lowest point in 10 or 12 years. So you got to think about those pre-pandemic levels around 210,000 foreclosures. That's when credit was at its best.

And that -- we expect that to deteriorate. So I'd strongly suggest that foreclosure levels doubling is an extremely conservative measure. Now the one thing I would point out, that there is a timing factor. People in the industry have been very focused on making sure the customers get every opportunity to modify loans, and the regulators are making sure that everyone is doing that.

So there could be some delays. There could be further delays. We've already pushed out our ramp by almost six months. That could be pushed out a little bit further.

But there's no question that -- no question that foreclosure levels are going to double, if not more. If you take the pre-pandemic level of roughly 210,000 foreclosures, that doesn't factor in all the built-in inventory that there haven't been any in two years. So yes, there's been home price appreciation, but delinquency levels will definitely rise from where they were. And again, I'd say that's a very conservative measure.

Operator

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

Doug Harter -- Credit Suisse -- Analyst

Just hoping you could talk about the Origination volume outlook and cash out. Just -- how willing are customers still -- how willing are they to still do cash out just given how much mortgage rates have risen?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, there's definitely a little bit of rate shock for folks. But the -- it's not that we expect people to do cash out because they're attracted by the rate, but that they have a need for cash. So there's a lot of things we've seen anecdotally of what our customers are doing. They're either not able to move up to the next house because -- not just because rates are high, but because home price appreciation have pushed those homes out of their reach.

So they're renovating their homes or expanding the homes that they're in and they're doing cash-out refinancing to do that. But there's any other number of reasons why people will tap the equity in their home. Now having said that, we don't expect volumes to be anywhere near where they were for the last two years. We expect them to be about half that level.

And that's consistent with what we saw -- if we went back to 2018 when we were in a similar environment, we saw a similar drop-off and -- we've already seen it happen in the first quarter. I mean, two-thirds of our refinancing were cash-out refinancing. And as of every day up until today, that ratio is increasing. So people are willing to do it.

And I say it again, if you think of rates 5% to 6% after tax and you compare that to any other form of consumer debt, it's ridiculously inexpensive to tap the equity in your home.

Jaime Gow -- Executive Vice President and Chief Financial Officer

Yes, Doug. I mean, it's anchored on -- we just went back and looked at historically what we've done in a similar environment. And so I think the -- we think there's a lot of opportunity there, a lot of opportunity.

Operator

Our next question is a follow-up from Kevin Barker with Sandler. Your line is open.

Kevin Barker -- Piper Sandler -- Analyst

I just wanted to follow up on some of the comments around Xome. What percent of your pipeline is third parties versus coming from Coop servicing portfolio? And how does that compare to what it was a couple of years ago pre-pandemic?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, a couple of years ago it was almost all Mr. Cooper. Today, it's 80% third parties. And the 20% that Mr.

Cooper is providing is falling rapidly. So it's a completely different business today than what it was three years ago.

Kevin Barker -- Piper Sandler -- Analyst

And what percent of market share would you estimate you have today in that industry? I think you might have mentioned 30%, but could you clarify that number?

Chris Marshall -- Vice Chairman and Chief Financial Officer

No, that's correct. It's -- as of today, it's 30%. As -- if we factor in -- allocations we believe are increasing. We've been in discussions with clients that intend to shift.

If they don't use a single provider, we share allocations with one or more other platforms. And we are fully expecting those allocations to increase. By year-end, we expect to be at 40%.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then on the early buyout revenue obviously being impacted by higher rates here, do you expect that to go down to near zero or minimal levels? Or is that -- would you expect to sustain some early buyout revenue if rates were to stabilize?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think EBO revenue is de minimis at this point. So yes, I'd say it's down to zero for modeling purposes.

Operator

Thank you. This concludes the question-and-answer session. I'd now like to turn the call back over to Jay Bray for closing remarks.

Jay Bray -- Chairman and Chief Executive Officer

Thanks, everybody. Appreciate your participation in the call. Have a great day.

Operator

[Operator signoff]

Duration: 54 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 and Chief Financial Officer

Jaime Gow -- Executive Vice President and Chief Financial Officer

Kevin Barker -- Piper Sandler -- Analyst

Giuliano Bologna -- Compass Point -- Analyst

Eric Hagen -- BTIG -- Analyst

Mark DeVries -- Barclays -- Analyst

Doug Harter -- Credit Suisse -- Analyst

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