Greetings, welcome to the Home Point Capital Q4 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lesley Alli. Thank you, Ms. Alli. You may begin. Thank you, operator. Welcome to Home Point's Q4 and Fiscal Year 2022 Earnings Call. Joining me this morning are Willie Newman, President and Chief Executive Officer, and Mark Elbaum, Chief Financial Officer. During our prepared remarks, we will be referring to a slide presentation which is available in the events section of the Home Point investor relations website. Before we begin, I'd like to remind you this call may include forward-looking statements which do not guarantee future events or performance. Please refer to Home Point's most recent SEC filings, including the company's annual report on Form 10-K, filed for the year end December 31st, 2021, for factors which could cause actual results to differ materially from these statements. We may be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to the nearest GAAP figures in Home Point's earnings release, which is available on the company's website. Now I'd like to turn the call over to Willie Newman, President and Chief Executive Officer. Thanks, Lesley. Good morning, everyone. During my prepared remarks, I'm going to discuss the mortgage environment, which presented as one of the most challenging years in history in 2022. I'll also discuss the steps Home Point has taken to navigate this environment, as well as supporting our long-term sustainability and our key areas of focus as we position ourselves for return to growth and profitability in 2023. After that, Mark will provide more details on our results for the 4th quarter and full year 2022, as well as some initial insight into the 1st quarter of 2023. We'll then open the call to take your questions. No doubt about it, 2022 was an incredibly challenging year for mortgage banking. The year was marked by multiple headwinds, including higher interest rates, low housing supply, and significant overcapacity, just to name a few. This ultimately resulted in extreme conditions for all market participants. These challenges have continued into 2023. With refinance transactions at all-time lows, seasonality has come back into a mortgage originations. As such, the Q1 of 2023 will likely be the low point in the current origination cycle. The good news is that the seasonality curve should slope upwards as we move into spring and summer. The MBA projects a 46% increase in origination volume in the Q2 of 2023 versus the Q1, propelled by a seasonal increase in home purchase activity. At Home Point, we spent 2022 resetting the organization to both navigate through the current challenging environment and, as conditions improve, start to sustainably grow again. Our top priority has been to build and maintain a strong liquidity position. We have divested non-core businesses and sold non-core assets. We have maintained strong relationships with our leverage providers and have ample access to additional liquidity. In addition, through our focus on margin over volume, we've rebalanced our operating cash flow to best leverage the historically strong performance in our servicing portfolio. In the Q2 of 2023, we expect to be operationally cash flow positive, which is a massive shift from our position in 2021 and 2022. This change in our cash flow dynamic is driven in large part by the historically strong performance in our servicing portfolio. This is driven by three factors: historically low prepayments, historically strong credit performance, and historically high levels of earnings on our servicing-related deposits. To give you an idea of the historical scale, prepayments are running at 3%, which is half of the historic floor level of 6%. Our servicing book is a critical input towards our path to profitability in 2023. We have also made extremely difficult decisions to reduce the size of our organization, including an additional reduction in force in early 2023. Our dramatically smaller cost profile is another primary driver of our path back to profitability during 2023. Including all actions taken since the start of 2022, we have reduced our fixed expense base on an annualized basis by over $250 million. We have also expanded our efforts to reduce the overall size of our balance sheet with the objective of having it be more reflective of our current size and operational scope. During the first half of 2023, we plan to largely complete these efforts, which will both enhance our liquidity through select asset sales and improve our operational performance. After all this hard work, we are finally prepared for sustainable growth as the seasonality curve ramps upward. All obtainable data indicates that the wholesale channel provides the greatest opportunity for originations growth in 2023 and beyond. The systemic benefits created by the broker wholesale lender partnership are even more apparent in a challenging market, as we saw by the increased migration of retail loan originators in 2022. We are all wholesale all the time. What's the bottom line? We expect to be operationally cash flow positive starting in the Q2 of 2023, and we expect to be operationally profitable in the second half of 2023. With that, I'd like to turn the call over to Mark. Thanks, Willie, and good morning, everyone. We've included in the presentation and earnings release our standard period-over-period financial results. I'm going to focus my discussion on the steps we've taken to best position our company for a return to growth in 2023. We'll be happy to answer any questions you have regarding the financial results following our prepared remarks. Looking back at our financial results for the Q4 and year end to December 31st, 2022, we effectively delivered on three primary objectives. Maintaining a strong liquidity and leverage position, executing on expense reduction and efficiency initiatives, and improving our cash flow and earnings profile. As Willie mentioned, liquidity was our top priority in 2022. In the Q4, we completed divestitures of non-strategic assets in Longbridge and the HPMAC Asset Management vehicle. We also sold approximately $6 billion of our Ginnie Mae MSR book. These actions resulted in a year-ending available liquidity of $663 million, up from $569 million in Q3. A strong foundation to support our company for long-term growth. Moving forward, we will continue to opportunistically sell Ginnie Mae servicing rights and strategically right-size our warehouse lines of credit to minimize associated costs and more efficiently operate in an increased interest rate environment. On the expense side, in the Q4 of 2022, we further reduced quarterly expenses by 31% quarter-over-quarter, excluding the $13.4 million restructuring and $10.8 million of goodwill impairment charges in the Q3. Comparing Q4 of 2022 to Q4 of 2021, we reduced our expenses by 58.5%. As previously reported, we took cost-cutting measures that resulted in approximately 970 people exiting during the Q4 of 2022, reducing our year-end headcount down to approximately 830. Additional actions in the Q1 of 2023 further reduced headcount, which taken together, will result in an annualized cost savings of approximately $80 million. In the first half of 2023, work continues on the expense side as we review contracts and facilities for additional cost reductions to support the current size of the organization. Speaking to our improved cash flow and earnings profile, our servicing segment earnings trended positively in the Q4 of 2022, generating an adjusted contribution margin of $33.3 million in the period. Our weighted average coupon on the servicing portfolio is 3.35%, and 60-plus day delinquencies remain less than 1%, resulting in record low prepayment levels, which we continue to see thus far in Q1. As Willie mentioned earlier, we strategically prioritized margins over volume. Consequently, we produced total Q4 origination volume of $1.7 billion and $27.7 billion in total volume for the full year. gain on sale margins attributable to the channels before giving effect to the impact of capital markets and other activity increased to 86 basis points in the Q4 of 2022, compared to 51 basis points in the previous quarter and 58 basis points in the Q4 of 2021. The other loss on sale declined to $8.7 million from $17.4 million in Q3 as a result of more stable capital market spreads, lower charges to our inventory held for sale outside of agency execution, and declining provision for repurchase reserves. Reserves are based on historical production levels, and the margin is based on current production levels. We do expect them to begin to align this year. Reiterating Willie's comments on our forward action plan and financial outlook, we view the proactive steps that our organization took in 2022 as necessary building blocks for a stronger performance in 2023. We were able to hit the mark on objectives related to cost reduction, liquidity enhancement, and cash flow improvement, and anticipate a return to strategic production growth in 2023, even in the midst of continued market pressures. That concludes our prepared remarks for this morning. We are now ready to turn the call back to the operator to take your questions. Operator. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Doug Harter with Credit Suisse. Please go ahead. Thanks. Willie, on your comment that you would expect, I guess, what was it, the cash flow breakeven and cash flow positive in the Q2, can you just talk about what type of volumes you would expect in that environment and, you know, kind of how you would trade off, kind of volumes versus cash flow in that scenario? Sure, Doug. Yeah, I mean, as Mark talked about, we are kind of fixing into a certain margin level. You know, it approximates what we had in the Q4. You know, we're trying to get a little bit more out of it based on what's happening in the market, and we're going to let volume kind of toggle. I think, you know, volumes in the Q1 will be lower than they were in the Q4, and we would expect an increase from there. I don't think we're Mark, at this point we have specific numbers on that. We're not giving yet that level of forward guidance. You know, the point, Doug, would be that the earnings off of the servicing portfolio are gonna be, you know, pretty high and outweigh at that lower production level. While we think Q2 production will be higher than Q1 production, it's still gonna be relatively low. Right. Consequently, it earns a lot less cash. Couple that with the expense reduction moves that we make that will be fully baked in by the time we get to the Q2, that's gonna lead to cash flow positivity. Got it. Just on the near term margin environment, it seems like, you know, the competitive environment, you know, a little bit of pullback from, you know, from some of the competitive pressures. Are you seeing that in one, you know, so far in the Q1? We have more recently. I think the quarter started off, you know, pretty tight, and it's kind of loosened up a little bit. You know, because we're fixing more on margin, we're gonna see a little bit more in flows. Our flows have increased, you know, certainly in March over what we saw in January and February. Okay. Thank you. Our next question comes from Mihir Bhatia with Bank of America. Please go ahead. Hi. Good morning, and thank you for taking my question. I wanted to start with the 64 basis points headwind in the gain on sale. Just trying to bridge the gap between reported and the channel gain on sale margins. You mentioned it briefly, but can you provide a little bit more color on what exactly is happening there? Why has it been so challenging in 2022? How long does the timing impact you talked about, you know, take to rectify, if you will? Sure. You know, we continue to have what I think we described in the past as a denominator problem. What I mean by that is the reserves and the provisions that we need to take for repurchase activity is based on a circa 12-month lag. If you look at our volumes 12 months ago, we were originating, you know, maybe $20 million, or, well, I forget exactly how much, but a lot more than we're originating today. Substantially more. Those are the reserves we're taking. Because of the way GAAP works, I look at margins based on current period production, which for this particular quarter was about $1.4 billion of total fallout adjusted locks. If you look into the details, you'll see that in the Q3, we took provisions and other activity of about $17 million. This quarter, that number was down to about $8.7 million. Because I'm dividing it by such a small denominator, it puts a lot of pressure on that top-line number. That's what's going on. The reality of it is that I expect that to normalize over time. If you're looking at a 12-month lag, it should start to normalize itself out by the second part of 2023, just as, you know, because that tail starts to more closely replicate our current level of production. In fact, that could even reverse itself as I start to see production, you know, grow, you know, as we come through seasonality, into a more normalized market. Right. That's what gives us a greater degree of comfort that we'll be operationally profitable in the second half, is that we expect those things to converge to the more normalized level or, I guess, the new normal as it relates to volume. Got it. Then just, going back to, I think, like, Doug's question just about, you know, how you get to be operationally cash flow positive in two Q, and then I guess profitable in 2H 2023. On the cost side, do you feel like you have now taken all the actions? I think there's a little bit more of right sizing of lines, it sounded like. Beyond that, like from a headcount or other cost savings perspective, are the actions now already been taken and now it's just a point of like, you know, you just wait as volumes come back a little bit that's what gets you there? Or is it like you still have to do more stuff on the cost side? Yeah. At this point in the cycle, I don't think we're ever done with the cost side. We'll continue to be very focused on looking at everything that we're spending money on, how we're staffed, the structure of the organization, et cetera. What I would say is, like, the very significant actions we've taken, it's gonna be smaller scope likely than what we've done previously. We're still gonna be on it consistently. You know, I would say, though, that we're not wholly dependent on that focus in order to get to operational profitability, it certainly supports getting there and, you know, maybe gives us a little bit of cushion in case there's variances in the market that, you know, are unforeseen at this point. Got it. Thank you. Thank you for taking my questions. Our next question comes from Rick Shane with JP Morgan. Please go ahead. Thanks everybody for taking my question or questions. First thing, obviously one of the big factors in the Q4 was the significant decline in the comp expense. I'm curious as we look towards 2023, is that the run rate, or is there a variable function there that as volumes pick up, we should anticipate? Yeah. Here's how I would think of it, Rick. If you look at where we landed at the Q4, take that number, and I had mentioned on the call that actions we took in the Q4 and additional actions we took in the Q1 will result in a salary and benefit reduction of circa $80 million on an annualized basis. Figure that's roughly $20 million a quarter. That should get fully baked by the time we get into the Q2. I would add maybe a 20 basis point variable load to production. Whatever your volume production is, it'll be 20 basis points on that. That is probably a decent way for you to forecast your salary and benefits line. Got it. Mark, when we think about it, total expenses in the Q4 were $63 million. That annualizes, that annualizes to $250 million. You're saying there's $80 million of cost cuts from there, then add the 20 basis points of variable volume activity. Is that the run rate? Let's be careful with that. If we're at 63, and I'm just gonna go quarterly because that's the way I think of it. If we're at 63, you can deduct 20 from that. Okay? That takes us to, let's call it 43. Already in that 63 is circa 20 basis points of variable cost on the $1.7 billion that we funded. Okay? Now take your model and assume ±1.7 and attach 20 basis points to that variance. Got it. Okay. Very, very helpful. Thank you for walking me through that. The other question I have is obviously, as part of this, you have in terms of both cost reduction and focus on margin, you have conceded a substantial market share, probably cut your market share in half on a quarter-over-quarter basis and could be down 80% on a year-over-year basis. Do you think that with the revised cost structure, you will be in a position to start regaining market share? Will that come to you naturally because of what's going on in the market? Or will you need to reinvest in the business in order to recapture some of that share going forward? Yeah. Hey, Rick, it's Willie. I mean, we have been reinvesting in the business. We've been very focused on specific activities that will help us regain some of the market share that you referenced. We've also been able to preserve the significant majority of our coverage from a sales standpoint. That combination, we think will result in we'll get the natural growth from the seasonality curve, but additionally, we'll start to take market share from some of the market share back that we've conceded. Got it. Okay. Hey, guys, I just want to acknowledge, I know that there's been a lot of hard work and a lot of hard decisions to get where you are. You know, it's going to be interesting to see how it plays out over the next year. Thank you, guys. Thank you. Our next question comes from Kevin Barker with Piper Sandler. Please go ahead. Great. Thank you. Just to follow up on the losses or the other provisions you put up for reps and warranties due to higher interest rates, can you outline the level of reserves you have in place today? Also, have you taken a significant amount of losses throughout 2022 just because of higher rates impacting reps and warranties? Yeah. Kevin, we're, I mean, the answer is yes. We started 2022, well, we were able to trade our scratch and dent inventory in the circa 90 context, is where we started 2022. By the time we got to where we are now, that market's trading around the mid-70s, low 70s. That's the source of a lot of the losses that we've taken, is just having to mark not only the scratch and dent inventory down, but also the reserves for potential future repurchases. We had to increase the severity on that. That was the cause of a lot of the losses. Now, the good news, if you will, is that we're starting to see that market certainly bottom up, if not recover. We're starting to see numbers that are closer to the mid-70s to high 70s. We feel, at least that that's trending better. I think that's a combination of credit risk spreads tightening, and there's a fair amount of demand for, the paper. Well, our scratch and dent inventory tends to be performing. It tends to have doc defects. So if you think about a performing loan that you can buy at less than $0.80 on the dollar, that's a pretty nice yielding asset. That's what we're seeing with our scratch and dent inventory, but that's the source of a lot of the losses that we've taken. The additional provisions that we took in the Q4 are quite a bit less than they had been in previous quarters, in part because, number one, we're starting to see that stabilization that I mentioned. Number two, we're you know, we're getting caught up in terms of the audits and the repurchase requests as well. The agencies are working their way through that. That's why I have reason to believe that as we move through 2023, we're gonna start to see that relationship normalize relative to current production. Yeah. I I think we asked for the at the end of that. The balance was about $26 million in reserves, and that's reserves against potential future repurchases that, you know, are not yet on our balance sheet. Yeah. The other thing that's happening, Kevin, is that the rate gap is narrowing because rates are obviously floating kind of high, but the repurchases because of the lag Mark mentioned, we're kinda not only are we getting the lags kinda catching up to our lower level production, it's also catching up to the higher rates for that lower level production. You kinda have 2 or 3 positive trends, you know, in a to kind of start to narrow what's been happening. Could you remind us how far back the agencies could look back for any loans that may have defects? They could look back as long as three years, Kevin. Okay. Typically they have, like, an upfront review where or some review in the beginning, right? To try to... I mean, they typically review upfront, and they try to do as much as they can. Post that, you know, if the loan's performing It's in a pool. It's not really in their interest to try to, you know, find loans to have us buy back. If the loan goes into default, that might be a different issue, and they could certainly look at it at that point and buy it back. Most of the review happens with earlier, you know, fresher production, if you will. Although, you know, they are behind, we do have this one-year lag, roughly. Yeah. Which again, with our servicing performance, that's why we feel good about where we're at from a reserve standpoint. Okay. That provision was, by my math, $8.7 million in the Q4 on $1.7 billion of production, which would imply, what? Roughly 51 basis points of headwind in the Q4. It does. on gain on sale margin. Yeah. Yeah. Except that if we were to do it on a vintage basis, that 8.7 would be applied to a much larger denominator, but that's just not the way the math works. The way the math works is the way you described it. Okay. What was the average amount of basis points hit on gain on sale that you recorded in 2021 when rates were, I would say, less volatile or not persistently increasing like we saw? Yeah. What I'm trying to get at is like what is a normalized gain on sale that you would be producing right now excluding the movement in provision? Yeah, I understand your question. On every loan that we originate, we have to put aside something for potential rep and warrant losses. In 2021, that number was circa two to three basis points. Now that number looks more like between six and seven basis points on every new loan that we put up. Yeah. I'd say a normalized level is somewhere in between those two numbers. I would agree. I would agree. The reason it's so much higher now is because I'm providing at around a, you know, a low seventies number for severity. That's probably not gonna persist because we're gonna have rates and, you know, current note rates and investor required rates for scratch and dents are gonna converge. Right. Okay. In a benign interest rate environment, we should see absolute margins. In the lower-ish Yeah. Context. Yeah. Okay. All right. Thank you for taking my question. Sure. Our next question comes from Steve DeLaney with JMP Securities. Please go ahead. Thanks. Good morning, Willie and Mark, congrats on all the progress you've made on expenses and the operational overall. Look, Kevin did a good job on the gain on sale. I was gonna kinda hit the same thing. I'll move on to something else. You know, you've targeted your Ginnie Maes as the MSR product that you're primarily trying to reduce. Is that due to just higher general operating costs to service, or does credit come into that as a big factor in why you're sticking with the GSEs but moving away a bit from Ginnie Mae? Yeah. Hey, Steve, it's Willie. It's actually, yeah, both, I'd say. You know, my experience, especially if you're not, you know, you're not servicing the Ginnie Mae product yourself. This is not to say anything bad about our servicing provider. It's just that we're one step removed from the action, and there tends to be hidden costs associated with Ginnie servicing as, you know, with the advances for non-performing, whether it's some of the dings that you take when you actually sell the servicing that you may not recognize as easily when you're holding the servicing. All of that and the fact that, as you know, we've sold a significant part of our Ginnie Mae previously, just led us to the point where, you know, to create liquidity and to make our servicing more predictive from a, from a return and performance standpoint, it just made sense for us to sell the Ginnie. Got it. That makes sense. Now, you saw your total UPB drop about $5 billion in the Q4. Obviously, the pace of shrinkage in servicing has really slowed. Where do you see, have you reached sort of a stabilization point? And just looking out over the balance of 2023, for year-end, would you expect your MSR UPB to be smaller than the $89 million or flat? Or what's kind of your outlook for the size of the servicing book? It's gonna be in that neighborhood. I think, you know, So far prepays are extraordinarily slow, but so too is the amount, the level to which we're replenishing it. I would expect us to be able to replenish a little bit faster than our speeds as we move through the cycle and get out of the seasonality period. You know, not substantial. I think 90-ish. We are gonna continue to sell Ginnie, by the way, so that's gonna, you know, that's gonna be a negative on that number. We have a Ginnie sale teed up for closing in the Q2. That's coming as well, so. You could think of it being in that, you know, high 80s, 90 area. Thanks, Mark. That's helpful. One final quick thing, Willie. I realize this is premature, if in this market, if you can do long-range planning, I guess that's anything past next week. Like the board, when the decision was made to eliminate the smaller $0.04 dividend, are there any, like, benchmarks, and I'm thinking 2004, let's say, or whatever that point is of accomplishment of stability and where... Conversations with the board, what timeframe should we think and investors think is realistic to have any expectation of the possible reinstatement of a cash dividend? Thanks. Yeah. That's it for me. No. Thanks, Steve. I think, you know, for kind of first things first for us, which is let's stabilize the cash flow, get cash flow positive, then let's get the earnings positive. After we do that for a period of time, we'll consider other alternatives. I think right now, because we are creating liquidity, our primary focus is on, you know, one, making sure the business is supported, which at this low level, there would have to be very significant shocks before we would suffer from a business standpoint. Secondly is to pay down some of the debt that we have. Got it. Got it. I can understand the debt. Thank you both for your comments. You got it. Again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Doug Harter with Credit Suisse. Please go ahead. Thanks. Following up on that last comment about paying down debt, if, you know, as you kind of return to operating cash flow positive, you know, kind of how do you think about using your liquidity in order to pay down debt? You know, just kind of what are your thoughts around using that return to cash flow positivity? Yeah, that's. Doug, as I mentioned, really our primary focus right now is in paying down our debt. Especially our MSR line is based on short-term rates and, you know, with the curve being where it is, that's gotten a lot more expensive than it was previously. It really, you know, because we're in that position where we're generating cash. We also have additional asset sales, as Mark mentioned. We're gonna be able to make a meaningful reduction in that line over the next couple quarters. That will be our area of focus. Then I guess just how do you think about, you know, the MSR lines versus the unsecured debt, which obviously trades at a meaningful discount and, you know, being able to create, you know, some equity value by paying it down at a discount? Yeah. We certainly will consider that as well. Again, we want, we wanna first get to that operational cash flow positive point. We don't wanna be too premature in committing the cash that we're generating into something that is based on that longer term tenor on the debt. But it's certainly something that we've looked at and we will consider. Got it. Lastly from me, just, you know, kind of given the, you know, the smaller size of the business, just, you know, how do you think about long-term, you know, kind of staying independent versus, you know, possibly, you know, considering strategic alternatives and selling the business? Well, I think, yeah, you know, you have to be kinda cognizant of what's happening in the market. We are a smaller footprint. We also have lots of liquidity that we're, you know, in the process of generating and have access to. We're, you know, we're looking out and seeing what might make sense. You know, being a public company, we're, you know, we're kinda open to having dialogue in either direction. You know, it is an environment where we do believe things will consolidate and, you know, we're kind of have our eyes open about that. Okay. Thank you. There are no further questions at this time. I would like to turn the floor back over to William Newman for closing comments. Please go ahead. Yeah, thanks. You know, first of all, I really appreciate the questions and, you know, your interest in Homepoint. With having the smaller footprint, sometimes we wonder how much interest we'll have. We do appreciate the questions and, you know, the intelligence of the questions. I do want to recognize Mark, before we sign off, because everybody knows Mark's leaving the organization in a couple of weeks. You know, Mark came into our organization at a time when the business and the company were growing very rapidly, and at the same time, we were doing this little thing called an IPO. He had to learn kind of about who we were and what we were doing. At the same time, he had to really be one of the leaders in taking us public. He did both those things extremely well. He was faced with the challenging market that we've experienced over the last 18 months, and he's helped us navigate through in a way where now we again, we're looking at growth and opportunity. You know, Mark, wanna thank you. Wish you the best in all your future endeavors, and you'll always be a friend of Homepoint. Thank you. Thanks everybody again for your interest. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.