Ocwen Financial (OCN) Q1 2022 Earnings Call Transcript

Ocwen Financial (OCN -1.04%)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Ocwen Financial Corporation first-quarter earnings and business update conference call. For information, today's call is being recorded. I would now like to turn the call over to Mr. Dico Akseraylian, senior vice president, corporate communications.

Please go ahead, sir.

Dico Akseraylian -- Senior Vice President, Corporate Communications

Good morning, and thank you for joining us for Ocwen's first-quarter earnings call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's chief executive officer, Glen Messina; and chief financial officer, June Campbell. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the Federal Securities laws.

These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to different degrees uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2021, and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again.

Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for, the company's reported results under accounting principles generally accepted in the United States.

A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release in the appendix to the investor presentation. Now I will turn the call over to Glen Messina.

Glen Messina -- Chief Executive Officer

Thanks, Dico. Good morning, everyone, and thanks for joining us. We're looking forward to sharing our progress with you this morning and our plans for the balance of the year. Let's get started with Slide 4 to review a few highlights for the first quarter.

We believe our actions to build the balance and diversified business have positioned us well to navigate the current mortgage cycle, and our first quarter results are consistent with our expectations. We delivered net income of $58 million, strong annualized ROE in the quarter and a 14% appreciation in book value per share from year end 2021. We are taking a cautious and prudent approach to investing and managing our liquidity position, which has improved from year end. Consistent with our previous guidance in the first quarter, we opportunistically sold select MSRs at what we believe are robust valuation levels to harvest value appreciation and mitigate asymmetric hedge risk in our MSR portfolio.

Our servicing platform is performing well operationally. Our servicing financial performance is improving with rising interest rates. MSRs are appreciating in value, runoff is declining. We continue to improve our cost structure and our portfolio is growing.

Yesterday, we announced our subservicing agreement with NRZ was renewed until year end 2023 with annual extension options thereafter. We thank NRZ for their confidence in us. We appreciate their business, and we are looking forward to continuing to serve them and their borrowers. Forward originations faced a challenging environment in the first quarter, while total servicing additions of $20 billion is up about 46% year over year, driven by subservicing additions.

Origination volume was down 13% year-over-year and margins were below expectations. We are taking necessary actions in forward originations to reduce our operating expenses and shift our product mix and service mix to restore profitability. Our reverse business is performing very well, both in originations and subservicing. Origination volume has more than doubled year over year.

Margins are holding flat relative to Q4 and the origination market is growing. Reverse of servicing is performing ahead of expectations, and we're building a strong opportunity pipeline to support future growth. Let's turn to Slide 5 to discuss the environment and our market positioning. Interest rates have risen higher and faster in the first quarter than industry forecast suggested just a few short months ago, and they continue to increase.

In the current environment, we see 3 main drivers of our profitability going forward. First, with the core strength in servicing and an expectation of even higher interest rates, we expect our servicing business will be an important driver of our future earnings. Our balanced business model is working. Servicing pre-tax income in the first quarter is up significantly versus the first quarter of last year, due to MSR value appreciation, lower payout volume, expense productivity and portfolio growth.

The profitability improvement in servicing and MSR value gains more than offset the decline in profitability in forward originations as volume and margins contract. Forward originations will be a less important driver of earnings in this market cycle but a critical element to replenish and grow our servicing portfolio. Second driver is subservicing. We made great progress in growing our forward subservicing business, supported by our global technology-enabled scalable platform.

We believe our success here reflects our proven industry-leading operating performance that has been recognized by Fannie Mae, Freddie Mac and HUD with top honors in their respective servicing performance recognition programs. We continue to be a leader in special servicing, supporting borrowers and investors and outperforming MBA and Moody's industry operations benchmarks. We work hard every day to earn our clients' trust and this has been rewarded with meaningful subservicing additions and potential opportunities. We've added $64 billion in subservicing UPB in the last 12 months.

We have $28 billion in scheduled subservicing conditions in the next 6 months and our forward subservicing opportunity pipeline of roughly $280 billion in potential additions. In addition to the NRZ renewal, we are in advanced discussions with MAV to potentially double our investment capacity. Third driver is our reverse business. We are the only large-scale, full-service, end-to-end reverse mortgage provider in the industry.

Industry opportunity is growing, our originations volume and market share continues to improve and origination profitability is stable. Our reverse originations -- our reverse subservicing business is gaining scale, profitability is improving, and we have an opportunity pipeline of roughly $55 billion. Overall, we're really excited about the potential for our reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power or the strength of our business. With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders.

Let's turn to Slide 6 for some servicing highlights. In servicing, MSR value net of hedges increased by $56 million in the first quarter. So far through April, MSR value net of hedges has increased by roughly $36 million. Based on our MSR sensitivity profile, we estimate an immediate 25 basis points parallel increase in interest rates would increase our earnings per share by roughly $2.70, which translates into a DBO one-off roughly $1 million.

Servicing income, excluding MSR gains, has increased by $23 million year over year despite lower EBO gains and interest rate-driven fair value losses on repurchase loans held for sale. Our diversified growth strategy executed by our enterprise sales team has resulted in meaningful servicing portfolio growth year over year, up over 50%. All segments of our portfolio, own servicing, subservicing, forward, reverse and small balance commercial are growing. We're targeting forward servicing and subservicing UPB of roughly $290 billion by year end.

The extension of our current subservicing agreement with NRZ, which covers approximately $54 billion in UPB at the end of Q1, had been set to expire in July. And the agreements have been extended until year end 2023 with annual extension options thereafter. As part of the renewal, we agreed to share a portion of some ancillary revenues and simplify the future process for extensions at the end of each term. As we've said in the past, this contract has a thin margin, but considering the significant cost reductions we've achieved in our servicing platform, we believe the renewal is a good outcome for both companies.

Moreover, we appreciate NRZ as a business partner and their confidence in our servicing capability reflected in their renewal. Through the combination of scale, portfolio composition, technology investment and process reengineering, we've reduced our servicing cost structure in base points of UPB by over 30% or almost four basis points in the last year. Through continued digitization and process improvement, we are targeting further reductions to seven basis points of UPB by year end. Higher interest rates are driving lower prepayments and related expenses.

We believe runoff may slow further to between 13.5% and 14%. As short-term interest rates increase, we expect higher revenue from our $2.4 billion of escrow balances. This should help offset higher interest costs on our $1.2 billion of floating rate debt. We are actively managing our portfolio as is evidenced by our sale in the first quarter, and we are executing several sales transactions to reduce our severely aged Ginnie Mae loan population.

We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense and de-risk to our portfolio. We did experience a loss on MSR value for these loans in the first quarter, and we'll recognize a loss on sale in the second quarter upon completion of the sale. We believe, we have tremendous leverage in our servicing platform, and we're excited about the growth opportunity for servicing, particularly in subservicing. Let's turn to Slide 7 to review forward originations.

I believe it's generally understood that the environment for forward originations is tough and likely to get tougher. We are taking actions in response. Our originations team delivered $20 billion in total servicing additions, up 46% year over year, largely driven by subservicing additions, but on a sequential quarter basis, total origination volume was down 23%. We experienced a pre-tax loss in forward originations driven by lower lock volume, lower margins and volatility-related hedge ineffectiveness.

During February through mid-March, we saw a wide range of MSR values between the primary originations market, our valuation experts and bulk sales transactions. At some coupon levels, the variation was more than 15 basis points. During this time frame, we made the prudent decision to intentionally constrain volume in correspondent lending by capping new origination MSR prices. While we validated MSR values through our valuation experts and our own bulk sales transaction.

Capping new origination MSR prices drove margin compression and volume reduction beyond competitive influences as well as drove hedging ineffectiveness. Since mid-March, we've seen a much tighter range of MSR values. We have since lifted the pricing caps and correspondent lock volume, margins and hedge performance have improved. We continue to focus on growing our client base, leveraging our multi-channel capability.

Our total client count is up over 2.5 times in the first quarter last year, and it continues to grow. We're growing higher margin Ginnie Mae and non-agency products and best efforts in non-delegated deliveries. Volume here has doubled year-over-year and April volumes have exceeded the first quarter levels. Our refinance recapture rate continues to improve.

We achieved 39% during the first quarter with March's level at 41%. We estimate annual forward consumer direct volume for 2022 will be roughly half of 2021 levels. Portfolio growth, improved recapture rate and cash out refinancings, which are now 72% of our business is offsetting in part to significant decline in rate and term refi opportunity. Under current market conditions, we must adjust our capacity and cost structure to match a small originations market.

In March, we executed actions to reduce our forward origination staffing by 21%, including contractors. Further reductions are expected to occur during the second quarter. We are targeting to reduce our cost structure in basis points of volume by roughly 45% by the fourth quarter versus the first quarter of this year. For the full year, we're targeting about $75 billion in total forward servicing additions.

This includes $45 billion in subservicing additions, including MAV and about $30 billion of forward originations. Let's turn to Slide 8 to discuss our reverse business. We're very excited about the opportunity in the reverse mortgage market, increases in home price appreciation, the increase in the maximum claim amount to roughly $970,000 in combination continue to fuel new loan production and is helping to offset the impact of higher interest rates. Demographics here are favorable with 12,000 people turning age 65 each day, and home equity held by this group now topped $10 trillion.

There is also a growing amount of research and positive news articles supporting the consideration of reverse mortgage as a retirement tool. Our origination performance has been quite strong and is another successful example of our balanced and diversified business model. We continue growing market share, which is up 1.5 percentage points over Q1 versus the same quarter of last year. Originations volume has more than doubled year over year.

We're seeing growth in all channels, direct-to-consumer retail, wholesale and correspondent lending, direct-to-consumer retail is our fastest-growing channel. As June will share in a moment, revenue margins have drifted down over the past year. However, margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing.

The integration of the RMS platform is going well. Loan boardings are ahead of schedule, and we are slightly ahead of our financial expectations as a result. Our subservicing opportunity pipeline has grown to $55 billion and interest in our platform has been quite strong. We expect the subservicing platform to be profitable by Q2 and thereafter, after we complete the integration and achieve our initial scale objectives.

We believe, we're uniquely positioned in reverse mortgage market and a diversification this business provides helps mitigate our reliance on the forward mortgage origination market. Now I'll turn it over to June to go through our financial performance in more detail.

June Campbell -- Chief Financial Officer

Thank you, Glen. Please turn to Slide 9. In the first quarter, we reported $11 million in adjusted pre-tax loss. You can see on the top right of this slide, a year-over-year walk.

Our Originations segment reported a $40 million reduction in adjusted pre-tax income from reduced industry volume and lower margins, while our servicing segment reported a $30 million improvement in adjusted pre-tax income from higher UPB due to growing subservicing, slowing prepayments and operational efficiency. I'll talk more about the segment results in the next few slides. Net income in the quarter was $58 million, up from $9 million year over year. Consistent with our first half 2022 guidance, strong net income was a result of $56 million in MSR fair value adjustments, net of hedges, which included $13 million of a valuation assumption loss on delinquent GNMA loans scheduled for sale in the second quarter.

Other notables included legal settlement recoveries and a favorable long-term incentive adjustment from the decrease in our stock price. We ended the quarter with strong liquidity, $269 million in cash and $45 million in available borrowing. Earnings per share increased to $6.30 and book value per share increased to $58. On the bottom right bar chart, revenue held year over year as higher servicing and subservicing fees from higher UPB in both servicing and subservicing was offset by lower origination volume and margins.

The chart on the bottom right of this slide demonstrates continued successful execution of our continuous cost improvement discipline. Please turn to Slide 10. Forward originations adjusted pre-tax income declined to a $13 million loss. As discussed, forward originations profitability was impacted by reduced industry volume and margins.

Our volumes were also impacted by our intentional strategy in correspondent to restrict volume as interest rates rapidly increased, and we saw a wide range of MSR values among the primary origination market, broker values and bulk market values. In addition, consistent with the second quarter of last year, we transferred SMP and flow volume to MAV, consistent with the terms of our agreement with MAV. You can see on the top right, the decline in revenue margins experienced in the consumer direct and correspondent channels. The margin decline is a function of intensified competition, our decision to limit new origination MSR values and resulting hedge ineffectiveness.

We're taking actions to return the origination segment to profitability, reducing costs and rightsizing segment operations as well as the corporate functions supporting the segment by approximately half, continuing to grow volume and higher margin correspondent products and delivery options. This volumes approximately doubled year over year. And as you saw in an earlier slide, we're continuing to improve recapture rates, which were up 10 points from fourth quarter of '21 to 41% in March of this year. Please turn to Slide 11.

The market opportunity continues to be strong in reverse originations with continued home price appreciation, resulting in increased customer borrowing capacity. Adjusted pre-tax income held to $10 million in the first quarter, consistent with the first quarter last year. Origination volume was up $284 million year over year, led by the consumer direct channel, which has the highest channel margins. The growth in origination volume offset lower margins versus the first quarter last year.

Margins by channel, while all were down from the first quarter last year, have been relatively stable in each channel since the third quarter of 2021. We remain optimistic on the growth opportunity in reversal originations, and we continue to invest in resources and marketing to grow the higher-margin consumer direct channel. Please turn to Slide 12. Profitability in the servicing segment has improved as expected with higher interest rates, our actions to build scale, deliver cost improvement, slower prepayments and integrate our reverse subservicing platform ahead of the plan.

On the left side of the slide, adjusted pre-tax income is up $23 million year over year to $16 million, driven by UPB increased to $275 billion as well as cost reduction of approximately four basis points of UPB. Prepayment rates were 10 percentage points lower versus the first quarter of 2021 due to higher interest rates. Unfortunately, higher interest rates also drove $7 million lower in gain on sale due to asset revaluations, mainly on our Ginnie Mae portfolio. On the right side of the slide, we show reverse subservicing results.

We generated a small positive adjusted pre-tax income in Q1 by accelerating boarding loans and achieving planned operating expense reduction, driving improved operating efficiency. We believe we are on track to achieve the $5 million in adjusted pre-tax income by the fourth quarter of 2022 for guidance provided on our earnings call in February. Please turn to Slide 13. This is our roadmap from actual adjusted pre-tax income in the first quarter to the projected fourth quarter of 2022, assuming a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment.

The roadmap is broken down by key actions to deliver our targeted returns. We expect between USD 9 million and USD 10 million improvement from productivity and rightsizing actions. As I mentioned, originations is targeting reducing costs by approximately half, delivering annualized expense savings of roughly $30 million. We expect between USD 10 million and USD 11 million improvement from growing higher-margin originations products and delivery options to correspondent and between USD 5 million and USD 6 million improvements from subservicing growth and reduced runoff.

Approximately, $28 billion in subservicing is currently scheduled for boarding, and we have a strong subservicing opportunity pipeline in forward and reverse. Our projected adjusted pre-tax income in fourth quarter is approximately $15 million, up from the $11 million loss this quarter. We're targeting between 9% and 15% after-tax ROE before notables in the second half of this year. We're slightly reduced lower end of our guidance since last quarter, given the severe impact of the current market environment on forward originations.

Our target return levels are consistent with our major competitors. We continue to guide to first-half earnings being driven by MSR fair value gains, offsetting origination market headwinds. Finally, consistent with our expectation for lower origination volume levels in a more competitive market for MSRs, we're evaluating all our capital allocation options, including to support debt and share repurchases. Now I'll turn it back over to Glen.

Glen Messina -- Chief Executive Officer

Thanks, June. Let's turn to Slide 14. We believe our balance and diversified business, exemplary servicing performance, proven cost management and track record of execution position us well to navigate the market environment ahead. Our first-quarter results are consistent with our expectations, and we delivered strong net income and book value per share appreciation.

Liquidity has improved from year end, and we're taking a cautious and prudent approach to investing, managing our liquidity position and capital allocation.Servicing financial performance is improving with rising interest rates, and we expect servicing will be an important driver of financial performance going forward. MSRs are appreciating in value, runoff is declining. We continue to improve our cost structure, our portfolio is growing, and we have $2.4 billion in escrow balances, which should generate increased revenues as short-term interest rates increase. We have a strong value proposition as demonstrated by our backlog of scheduled subservicing boardings, the NRZ renewal and a robust subservicing opportunity pipeline.

Forward originations is facing a challenging environment, and we're taking necessary actions to reduce our infrastructure, operating expenses and shift our product and service mix to restore profitability. We believe, we're uniquely positioned in the reverse mortgage market and a reverse business is performing very well, both in originations and subservicing. Favorable demographics and home price appreciation are expected to drive further market growth. We are focused on delivering prudent growth and capital management, and we're evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders.

We expect first half 2022 earnings will be driven by MSR fair value adjustments, offsetting originations headwinds and the build-out of our reverse subservicing platform. We are targeting after-tax ROEs before notable items in the second half of 9% to 15% with the expected benefits of successfully executing our business initiatives. I'm proud of how our team is executing in unprecedented market conditions. Our management team has a track record of successfully navigating multiple mortgage cycles with a focus on prudent growth, cost management, operational excellence and customer experience.

We will be unwavering in this focus. We are operating in a volatile and uncertain environment. We're closely monitoring the financial markets, economic environment and industry conditions closely. We're dynamically managing our operations, plans and targets and will adjust as necessary to address emerging opportunities and risks.

I'd like to thank and recognize our board of directors and global business team for their hard work and commitment to our success. With that, George, let's open up the call for questions.

Questions & Answers:

Operator

[Operator instructions] Today's first question is going to be coming from Mr. Eric Hagen calling in from BTIG.

Eric Hagen -- BTIG -- Analyst

A couple for myself, did you say that you expect to sell something at a loss in the second quarter? I may have just missed what it was and also the amount of what it was? Maybe you can rehighlight that. And then I think you noted some hedging ineffectiveness from more volatile interest rates. Can you talk about any developments of hedging the MSR of the pipeline and how you see that evolving with higher interest rates?

Glen Messina -- Chief Executive Officer

Sure. So I'll take those two separately, Eric. We are looking at selling some severely aged Ginnie Mae loans in our servicing portfolio. We had taken an MSR mark in the first quarter.

June, I think that was $13 million.

June Campbell -- Chief Financial Officer

$13 million. That's correct.

Glen Messina -- Chief Executive Officer

And once we buy those loans out of the respective pools and sell them, there will be an additional loss on sale. We didn't really disclose how much the loss on sale is. But you get a sense of what we talk from MSR market perspective. In terms of hedging ineffectiveness, number one, interest rate volatility during the quarter did give rise to some of the hedge volatility we saw in the mortgage pipeline, less so on the MSR hedge.

And the actions we took to quite frankly, step on MSR prices just given the wide range of values we were seeing in the first quarter also contributed to some of the hedging ineffectiveness because they're artificially constraining essentially the value of MSRs in the pipeline. We've since seen MSR value is narrow. We've obviously confirmed values with our servicing brokers and our own bulk sale transaction. And we've lifted the constraints on pricing.

We're seeing better hedge performance during the -- I would say, the latter half of March and into April and margins as well have improved because we're not artificially constraining MSR values. On the servicing hedge, again, with interest rates rising, we have repositioned our hedge. So obviously, we've switched to a more option-based strategy as which I think is prudent as rates are moving up. We've rolled up the strikes in our TBAs and we've taken on swap coverage that also helps preserve liquidity as rates are going up, you're not burning cash in terms of having to post margin, so to speak.

We have as well modified or adapted our hedging policy, have a sort of hedging policy for this environment. We are focused now on rate protection down 25%, down 50% and targeting 40 basis point hedge coverage ratio for the down rate scenarios.

Eric Hagen -- BTIG -- Analyst

OK. That's helpful. Maybe just a couple more on the servicing, do you think you guys had ever look to sell MSRs as a form of liquidity and capital management, especially if MSR values stay relatively strong? And then can you also just quickly share how the profitability between the NRZ portfolio compares with just to say agency subservicing once you consider the G&A that goes with it?

Glen Messina -- Chief Executive Officer

Yes. Sure. So in terms of selling MSRs, look, I think what we've shown over the last 12 or 14 months, we dynamically manage our MSR portfolio. We are always looking at a couple of things.

One is views -- starts with view of value, right? So do we have a view of value on MSRs that differs from market participants? And if we think that our view of value is under where market participants are, we would choose to sell MSRs and harvest that value. Obviously, with interest rates going up and certain segments of our portfolio showing lack of better term, refinancing burn out of our prepayment speed slowing to a very large degree. It creates asymmetric hedge risk in our MSR portfolio. So that's essentially what we did in the first quarter.

We sold off those assets and mitigated that risk and harvested the capital appreciation or value appreciation in those assets. As June and I mentioned on the call, look, we recognize -- look, we are operating in a volatile environment. We are constantly evaluating our capital allocation strategy, and we'll look at opportunities to manage our MSR portfolio and generate liquidity in ways that can best maximize value for shareholders.

Eric Hagen -- BTIG -- Analyst

That's really helpful. How about the profitability between the NRZ portfolio relative to agency subservicing in this environment once you consider the G&A expense? I appreciate it.

Glen Messina -- Chief Executive Officer

Yes. Yes. So look, the NRZ portfolio, as we said, yes, at one point in time, it was unprofitable on a fully allocated basis, but we've -- since done a lot of work on our cost structure and have radically reduced our cost structure, particularly in servicing. In basis points of UPB, look, NRZ is -- and now what our cost structure is different -- and with some of the modifications we've made in the contract, look, NRZ is not really that different than agency subservicing in margin.

Now as a percent of revenue, it's lower as the costs are much higher given the delinquency. So the optics of it may be a little bit different. But net-net, we've managed our cost structure to the point where we believe that portfolio is generating profitability consistent with our agency subservicing.

Operator

[Operator instructions] We'll now go to Matthew Howlett calling in from B. Riley.

Matthew Howlett -- B. Riley Securities -- Analyst

Glen and June, just first on the April update, the estimate is $36 million up on the MSR value. So we to presume the book, current book now is over $60. Just give us an update on where we are on a book value basis.

Glen Messina -- Chief Executive Officer

Yes. We didn't -- there's lots of other puts and takes. We didn't really disclose book value per share. I'll leave it to you guys to run through the math.

Obviously, there's other things that go through our P&L that we've got to be conscious of. And quite frankly, the books aren't closed for April. So I really can't give you an updated book value per share number. But MSR values continue to appreciate, even since April, interest rates are higher now than they were at the end of April.

So MSRs were going to invest in these days.

Matthew Howlett -- B. Riley Securities -- Analyst

Absolutely. I guess where I'm going with this is the stock here now at 0.3 or below that of current -- potentially current book, when you prioritize, Glen, capital management, you mentioned stock buybacks. You mentioned debt -- possible debt repurchases, upsizing amount MAV, additional M&A. Can you just sort of probably go through those and sort of what are the priorities and how you expect to execute in this year?

Glen Messina -- Chief Executive Officer

Yes. Look, the priority for board of management is very simply maximizing value for shareholders, right? And we're evaluating all our capital allocation option funds to include share and debt repurchases to allocate our cap in a way that best makes sense for shareholders. Look, we're frustrated that the strength of our business model and our business performance is not being recognized in share price. And I think it's prudent and uplifting for us that we reconsider our capital allocation alternatives if there's a way to better allocate capital to create value for shareholders.

So yes, I mean, to the extent we are going to -- we would choose to move forward with the debt or equity repurchases. I mean, I am conscious of the leverage -- the financial leverage that's on the business. So as we think about it -- one of the things we think about is how much we allocate to debt versus equity and making sure we don't end up at an over-leveraged situation for the company. So again, all options are being considered.

You've hit the nail on the head in terms of what we're thinking through. And again, our focus here is maximizing value for shareholders.

Matthew Howlett -- B. Riley Securities -- Analyst

Gotcha. I certainly recognize you haven't be cognizant of the leverage, but it seems like liquidity position is improving and you certainly take advantage of some of the discounted debt and equity prices in the market. I mean you mentioned M&A. I mean what would you need -- what are you looking for that to add to the business? Just curious what would be something that you'd look to growing?

Glen Messina -- Chief Executive Officer

Yes. As we think about M&A opportunities, they fall into a couple of different baskets. I would say, one is increasing scale of our business platforms, right? So if there's an opportunity to increase scale of servicing, clearly, we'd look at it particularly from a subservicing perspective because it's not capital intensive. And then as well increasing capabilities, so as the GSEs have put in place more punitive measures against third-party originations for punitive pricing against third-party originations, which affects all aggregators with correspondent lending platforms, including ourselves and all our competitors, we've got to think about how much of our business flows through our correspondent channel and where we can add value there, which is best efforts delivery, non-delegated delivery, non-agency products, so expanding our capabilities in those areas, very important to us as well, too.

And look, we are -- we evaluate all M&A options via with the consideration of are they going to -- is it going to be value accretive for our shareholders? So look, TCB and RMS are examples of accretive deals, right? TCB was largely an MSR buy with a platform, made enormous sense for us to do, and it's been hugely accretive to our business, RMS as well too. We've built now a very powerful reverse mortgage business. So that's the type of things that we're thinking about.

Matthew Howlett -- B. Riley Securities -- Analyst

Great, Glen. Just last question. What are the conversations like with Oaktree? I mean, do they sound clearly, they're happy with the first round of MAV. Maybe just talk something about secure at it.

Is there anything -- does it go beyond that? Would they look to restructure some of the sub notes? Just what are the -- sort of can you just give us the updates on the conversations with them?

Glen Messina -- Chief Executive Officer

Yes. Look, first and foremost, Oaktree has just been an awesome partner. Really love the support we get from the Oaktree team. Every member is looking to certainly create value in MAV and create value in the company.

They are -- they have been hugely supportive, and we are just very appreciative of everything we've done for our business and continue to do for our business. Our discussions really have remained focused on MAV. MAV has been very successful for both of us. It's enabled us to grow subservicing quite a long.

And certainly, MAV is -- the investments they've made in MSRs have appreciated quite nicely. So generating great financial returns for MAV, which we're an investor, and we get a portion of that. And as we think about upsizing, MAV, we really think about a couple of things. So as we mentioned, we're in advanced discussions there, but with the rapid slowdown in originations market, we've got to think about, look, how big do we really need MAV to be, bigger is always better to some degree, but obviously, we want to size it appropriately for our business.

As I mentioned as well, second, look, there's been changes in the originations market. So look, the -- we have a benefit in that we have a multi-channel origination platform. So we participate in all the spaces and correspondent mandatory best efforts non-delegated plus we participate in the flow delivery channel. So the CRX -- Freddie Mac CRX channel and Fannie Mae SMP channel.

So we could take delivery. However, our customer wants to deliver it. And as we think about how the GSEs are incentivizing sellers to move between correspondent and CRX we have to make sure that, that's reflected appropriately from an operational mechanics perspective and our agreements with MAV. So there's a lot of devil in the details, and that's what we're currently sorting through.

And then lastly, as we always think about building diversification in our business and a lot has changed in the past year, and there's a lot of people who are investing in MSRs. And we certainly -- our first preference is always to work with MAV, but there are other players out there. And do we want to have a multi-source platform versus a single-source platform. So a lot of things to talk about, but most of the discussions have really been focused on MAV.

But again, Oaktree, great partner, love working with them. They've been terrific.

Operator

We'll now go to Mr. Marco Rodriguez calling in from Stonegate Capital Markets.

Preston Graham -- Stonegate Capital Markets -- Analyst

This is Preston sitting in for Marco. So you mentioned you're really optimistic about the growth opportunity in reverse originations that you're going to keep investing resources and marketing to sort of grow the consumer direct channel because it's the highest margin. Could you just sort of expand on that growth opportunity and what you think is possible there?

Glen Messina -- Chief Executive Officer

Yes. You bet. Look, Preston. We -- that -- we just love the reverse business.

We -- look, if you look at the mortgage landscape today, it's one of the few areas where opportunity continues to grow. Demographics are favorable. And it's a product that this day and age, with home price appreciation and higher -- the higher total claims amount from Ginnie Mae, which is roughly $970,000, $800. Look, this product can make a lot of sense for consumers.

And as you know, there's a fair amount that goes up front in terms of consulting with consumers to make sure the product is right for them. But look, it's a business where we continue to demonstrate really strong momentum. It's profitable. The origination side continues to grow.

Subservicing is growing. More specifically, on the investments in growing direct-to-consumer retail, that has been our fastest-growing channel. And as you probably saw on June's pages has the highest revenue margin, obviously, higher cost structure as well, too. But it's been a good business.

So look, we are investing approximately $2 million to $2.5 million in additional marketing spend and sales resources throughout the course of the year to drive additional production, which we've seen some of it in the first quarter, but really toward the second and really more so toward the back half of the year. We expect the payback on that investment. Again, assuming we execute and achieve our planned return, we contribute about $6 million to $7 million of incremental revenue to the channel through higher retail volumes. So net contribution, $4 million to $4.5 million, we think it's a great payback on investments and it's something we want to continue to allocate capital toward.

Preston Graham -- Stonegate Capital Markets -- Analyst

Got it. Makes sense. And then you've discussed a few other questions, this MSR values, I think it was up $36 million in April. Do you think -- how much room do you think is left for additional MSR valuation increases.

Obviously, there's a lot of factors outside your control, but if there's a way to quantify that?

Glen Messina -- Chief Executive Officer

Yes. So as we mentioned in our earlier comments, look, we -- our current DBO1 is about $1 million, but that DBO1 does -- or we've seen a decline certainly during the course of the first quarter, and that's because of convexity MSR portfolio, right? So it doesn't really move in a linear fashion because prepayments tend to slow and there's a floor, right? There's only so low prepayments can go, unscheduled prepayments. So in the first quarter as rates went up, we saw the DBO1 decline in absolute value went from roughly $2.6 million at the start of the year to about $1.5 million by quarter end. And as we said, looking at our rate shock at quarter end, it was about $1 million.

And look, from a model perspective, a lot of that's driven by flooring out of prepayment speeds. But again, as interest rates go up, there's escrow and float balances that are modeled in MSR valuations. And as interest rates rise, those are worth more money. So the value will continue to appreciate from a models perspective as rates go up.

Ultimately, though, look, it's really a question about market value and what kind of buyers are out there, buying MSRs and what limits might they impose MSR values or appreciation they may see in MSR value. So it is a market-based asset. We are seeing today multiples in the mid-5s, quite frankly, which is up from historic purposes, really pretty high. Could they go to six, maybe? Right now, it's certainly, with a number of us -- in our business have experienced for quite a few years and the industry seems kind of unheard of, but we are operating in unprecedented times for sure.

So look, it's -- clearly, the rate of MSR appreciation is declining. I think that's a given with how low rates are. One other things that we're doing, Preston, to manage our portfolios, as I said before, is managing this asymmetric risk. At some point in time, MSR values become really hard to hedge because there's more downside to than upside and you end up spending a lot of eye on options to hedge that.

So we're being attended to that. We're watching our portfolio, and we'll be making adjustments to our portfolio to make sure that we're not building unnecessary risk and asymmetric risk in our business that's expensive to manage.

Preston Graham -- Stonegate Capital Markets -- Analyst

Got it. That's helpful. Congrats on extending the NRZ agreement. I was going to ask for an update on the MAV upside, but I think you sort of already covered your discussions with Oaktree, but that is all I have, so I'll jump back in the queue.

Operator

[Operator instructions] We'll now go to Mr. Drew Mackintosh calling from Mackintosh Investor Relations.

Drew Mackintosh -- Mackintosh Investor Relations -- Analyst

Regarding the possibility of debt and share repurchases, has your Board approved any buyback programs?

Glen Messina -- Chief Executive Officer

Drew, so – no. Our board has not yet authorized a debt or stock buyback program, but we are, as I said, evaluating all capital allocation options, including share and debt repurchases to maximize value for shareholders. To the extent our board authorizes such a program, obviously, we would disclose it within the appropriate time frame after the Board authorization.

Drew Mackintosh -- Mackintosh Investor Relations -- Analyst

Got it. Can you quantify the amount of excess capital that could currently be deployed, whether it's the MSR purchases or buybacks?

Glen Messina -- Chief Executive Officer

Yes. We -- as you know, Drew, we certainly have improved our liquidity position since year end. It's been managing liquidity in these volatile and uncertain time is really very important, we believe, and we're taking a cautious and prudent approach to it. We are working through with the Board right now how much excess capital we believe we have for discretionary deployment.

A lot of factors go into that to include our view of risks in the business, our view of risk in the environment, the capacity we have with MAV, any other synthetic subservicing arrangements we may put together and our outlook for the originations business and how much capital will actually need to support it. So still a lot of details to walk through and I don't have any guidance on that. But rest assured, it's something that's top of mind, and we are having the appropriate level of focus to it.

Operator

Thank you very much, sir. As we have no further questions at this time, I'll turn the call back over to Glen for any additional closing remarks. Thank you.

Glen Messina -- Chief Executive Officer

Great, George. Thank you. And thanks, everyone, for your questions and for joining the call. Again, we believe our balanced and diversified business, exemplary servicing performance, proven cost management, track record of execution all position us well to navigate the environment ahead.

As we mentioned, look, we're operating in a volatile and uncertain environment. We're actively monitoring the financial markets, economic environment, industry conditions closely. Look, I think we've got a lot of value drivers here in the business. I don't think it's being appropriately reflected in the value of the company, but we remain encouraged and excited about the opportunities in the business and our capabilities to navigate the market ahead and look forward to talking to you next quarter at our next business update.

Thank you, everyone.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Dico Akseraylian -- Senior Vice President, Corporate Communications

Glen Messina -- Chief Executive Officer

June Campbell -- Chief Financial Officer

Eric Hagen -- BTIG -- Analyst

Matthew Howlett -- B. Riley Securities -- Analyst

Preston Graham -- Stonegate Capital Markets -- Analyst

Drew Mackintosh -- Mackintosh Investor Relations -- Analyst

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