Good day and welcome to the New Residential First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. . I would now like to turn the conference over to Kaitlyn Mauritz, Head of Investor Relations. Please go ahead..

Great. Thank you, Paul. And good morning, everyone. I'd like to thank you for joining us today for the New Residential's First Quarter 2021 Earnings Call. Joining me here today are Michael Nierenberg, our Chairman, CEO and President; Nick Santoro, our Chief Financial Officer; Bruce Williams, CEO of NewRez; and Baron Silverstein, President of NewRez..

Thanks, Caitlin. Good morning, everyone. And thanks for joining us. As I look back and we look back, what a year it's been. I am super excited and we're super excited for our future and what lies ahead. One year ago, our stock was trading with a $6 handle, in and around $6.50.

We're raising a pool of capital at 11% and the world continued to feel uncertain. Today, we have more vaccines than demand, the US is healing and NRZ just announced an acquisition of Caliber at $1.675 billion. What a difference one year has been. Our investment business and operating business lines had good quarters.

Looking ahead, we feel that we are poised to grow earnings and create a world class financial services company with Caliber. As the competitive landscape gets more difficult on the operating side, the environment will play into our strengths with our capital base, balance sheet and great leadership team.

The combination of the Caliber and NewRez teams, with the great talent in both organizations, will create a company to be reckoned with. The possibilities for us are endless. We will be focused on rolling out other products to our homeowners and build on the great retail presence that Caliber has created.

With refinancing volumes significantly lower and the purchase markets for housing expected to remain robust, there is nobody that will be better positioned to take advantage of this scenario than us. As we look ahead, our investment business is well positioned to take advantage of higher rates, with MSRs leading the way.

They will go up as rates rise leading to more cash flow and higher earnings. The addition of Caliber and the great strides we have made around recapture at NewRez will offset the lower expected earnings we will see in the origination business as gain on sale margins continue to shrink.

The potential for higher capital charges will lead to more consolidation in the mortgage industry and more MSR sales. .

All right. Thanks, Mike. Good morning, everyone. I'll turn on slide 17 and just to echo Mike's sentiment, we're also really excited about the opportunity to combine the NewRez and Caliber platforms.

And while we're in the early stages of our integration discussions, we believe the two companies will have significant upside that's going to accelerate our objectives and goals for the origination and servicing efforts.

As this slide shows, we feel the combination of the platforms will provide a strong alignment in both our business models and long-term strategies.

Whether that's in direct to consumer by increasing our recapture rates over 50%, leveraging Caliber's distributed retail channels to improve our JV franchise, or in wholesale, further penetration in the direct-to-broker channel, while expanding our non-QM platform, growing our correspondent footprint, expanding our servicing franchise in both our customers for life and special servicing strategies.

And as Mike also just talked about, the talent, scale, capacity support our growth along with our transformational mortgage technology. Transaction is going to be great for both companies. And we're looking forward to providing more details in the months to follow. So, turning to slide 18, give a little bit of color on the NewRez operating results.

First quarter of 2021 was a great quarter for our origination platform, including record quarterly fundings and record quarterly pull-through adjusted lock volumes. For the division, we ended the first quarter with $191 million of pretax income, a 23% decline quarter-over-quarter.

Primary reason for the decline is peak margin compression as we saw margins compress along with the rate move in February. However, in April, we've seen a stabilization of margins in all channels other than wholesale, which has remained under competitive pressure due to some of the moves from the larger players in the sector.

When I look at the performance of each channel during the quarter, we made progress on many of the key goals and initiatives that we talked about on our last earnings call. Direct-to-consumer remains a huge focus for NewRez and NRZ and a continued long term opportunity for our company. We've continued to grow this channel 30% every quarter.

And in March, we had our largest funding month, closing $2.3 billion in loans. This is something we're really excited about as our added capacity is starting to meet our demand and the prior changes in sales and operational efficiencies are taking hold.

In the JV business, the first quarter is typically slower than the rest of the year, given the seasonal volume slowdown in December and January. Our JV channel has also been historically purchase driven and we're seeing more purchase volume as refinances slow down.

Regarding our wholesale channel, we've continued to grow our platform by adding new customers, new broker relationships, building our branches. And while margins have compressed, the relaunch of our non-QM channel has begun to pick up steam.

We're now out with all of our product offerings, sales teams have picked up momentum, we saw locks of $35 million in April with a goal to get back to our pre-COVID levels of $125 million per month.

In our correspondent channel, we had another record quarter, purchasing over $17 billion in mortgage loans, with March being our largest funding month ever at over %6.5 billion. And we'll continue to evaluate the market dynamics of our correspondent channel, opportunistically buying MSRs and adding to our customer base.

So when I think about our performance for the first quarter, both in terms of funding units and other metrics we use to evaluate our performance, we saw great progress. Turning to slide 19, we showed this slide last quarter as well.

But I do want to highlight the market share growth as that continues to be agnostic to market conditions as all mortgage companies have grown origination production and profitability in 2020. Meaning, rising tide lifts all boats. However, we've demonstrated our ability to successfully grow not only our origination volumes, but also our market share.

And our focus is to continue capturing more market share. We believe we can do that across our platform and across our channels. At the end of the first quarter, our market share has grown 2.5%, which is 30% growth quarter-over-quarter. Small changes in market share can have a big impact on our overall profitability. And that's what we're playing for.

We also have one of the largest servicing portfolios, with over 1.7 million homeowners that we want to retain as customers of NewRez. And as we continue to build out our brand and get better at recapture, the plan is to execute on that goal. The right side of the page reflects our recapture performance in the first quarter.

I mentioned earlier on some of our process changes that have taken hold and that can be seen in the quarterly refinance recapture statistics, with a 27% increase quarter-over-quarter. And this proves out the importance of our brand awareness and recognition to further build customer loyalty.

The message being, as we get better connecting to our consumers, our direct-to-consumer platform will only continue to grow. Moving to slide 20. I already highlighted the performance of our direct-to-consumer in my earlier comments. However, just to reiterate that we've done a great job growing this channel, and you can see that in the top left chart.

Increased volume and quarterly fundings up to $5.7 billion. Pull-through adjusted lock volume of $6.4 billion, which in turn drives our recapture performance. We continue to see margin compression quarter-over-quarter. The DTC margins increased slightly in April. So, expectations are that margins may flatten for the remainder of the quarter.

We had our largest funding month again in March of 2021, and did so for each month in the quarter. And as I mentioned, changes to our tech and processing structure to improve efficiencies. We've also entered the new customer acquisition business and expect that expansion will offset some of the reduction in refinance volumes in the months to come.

Turning to slide 21. For the servicing division, we ended the first quarter with $31.6 million in pretax income, a 34% decline. The primary reason for the decline in PTI is related in large part to both seasonal adjustments to accruals that were released at the end of last year and a reduction in expenses.

For context, our third quarter 2020 PTI was $30 million and more in line to normalization of our servicing P&L. We ended the first quarter with an aggregate servicing portfolio of approximately $305 billion UPB and approximately 1.7 million customers which represents modest growth quarter-over-quarter.

And on the bottom right, you'll see a slight pickup quarter-over-quarter in terms of cost per loan to service, which is due to the efforts we employ to help COVID impacted homeowners achieve a loss mitigation solution and retain their home. We expect these costs to continue through the end of the foreclosure moratorium.

On slide 22, we continue to provide this summary as it's important to me, it's important to our business to showcase the strength of our best-in-class special servicer and our special servicing team. Jack Navarro and our special Shellpoint Mortgage Servicing team do an outstanding job and are well recognized in the industry.

It is one of the best special services in the business. The recognition from both Moody's and Fitch to upgrade our platform after the significant growth and the challenges from COVID are a further testament to our strength in special services.

On this last slide, slide 23, I think it's just worth highlighting the continued progress we've seen in terms of borrowers on forbearance.

Since the CARES Act was first announced, we've helped over 234,000 homeowners navigate the COVID pandemic, 142,000 resolved their forbearance, 40,000 homeowners have resolved their forbearance and since refinanced or paid their loans in full. Our numbers are in line with the industry and good work so far, but more to do to help out homeowners.

Now, with that, I'll turn it back over to Mike..

Operator, why don't – we'll turn it back over to you and open up the lines for Q&A. .

. Our first question today will come from Kenneth Lee with RBC Capital Markets. .

Just one on the funded origination volumes, wondering if you could just provide a bit more color around what you saw on the quarter. And perhaps wonder if you could just share some of the key factors that's driving the expected origination volumes in the second quarter. Thanks..

Just keep in mind in the context of our funded volumes, right, there is a lag in the context of – from locked to closing. And that depends on the channel of origination, say between 30 or 60 days or more in certain channels.

I think what we've seen is, and Michael briefly talked about this, we have seen a decline in our overall refinance volume as rates have risen. Our refinance numbers are down probably close to about 20% or 25%.

And so, we are starting to see a little bit of a stabilization, as I mentioned before, in the context of the month of April, where we've kind of leveled into what I would say perhaps depending on what happens on the interest rate environment, hopefully, a more normalized market. And I say that in terms of margins and funded volume..

Very helpful. And just one follow-up, if I may, just around the call rights. Wondering if you could just talk about some of the key factors driving the favorable environment right now..

In the call right business, a lot of it has to do with spread and where assets are trading, quite frankly. When you look at the loan markets, you look at the non-agency bond markets. We've been pretty clear, we're not putting out a lot of capital for non-agency mortgage securities here as we think the risk returns for us are not great.

As we look at the call business, however, and you look at, again, asset pricing, you look at what's happened with forbearance rates, we expect our call business having $70 billion to $80 billion of call rights to remain robust as we go forward from here on. And that's really what the drivers have been..

And our next question will come from Trevor Cranston with JMP Securities..

You guys mentioned normalization of gain on sale margins a couple of times.

I was wondering if you could dig into that a little bit more and maybe provide some context for where you're seeing margins today versus where they were in the first quarter, or just generally, what you what you guys would think of as a normalized overall margin for the origination business?.

It really depends on the channel, and we look at each of the channels on a different framework. I would tell you that the direct-to-consumer channel, we're seeing margins in the low to mid 300s. The JV channels or our retail channels we're seeing our margins coming in, say, the mid 400s.

TPO has been, as I talked about, somewhat volatile in the context as margins continue to compress, given the competitive pressures that we've seen. And we are now basically sub-100. And then, we've seen declines month over month. So, there's been a very, very, very steep decline in margins overall within the wholesale channel.

And that's why it's so important for us to focus on alternative products and Michael continues to talk about our non-QM franchise. And really, for us, it's a big push to make sure that we get that rolled out between us and as well as the partnership on the Caliber side.

On the correspondent side, we have definitively seen kind of what we're hoping for, is a little bit more of a flattening of where we are with margins. And I would tell you that they probably range around 35 basis points, and it just really comes down to how your splits are and how you attach to the channel overall.

But I would tell you that they've also flattened out around that 35 basis point range..

One further comment on that. You would expect as we go forward margins to normalize back to probably 2019 kind of levels, I think, for the industry.

And when you think about where we are and Baron always refers to the so-called channels, with the combination of Caliber and NewRez and thinking about retail and the refinancing markets coming off, the retail channels or the retail network is so important to us.

The direct-to-consumer channel is very important to us, and then we think about our JV channel. Doesn't mean we're getting out of any channel, but I'm just saying when you think about from a profitability standpoint, a lot of those three areas are very sticky in nature when you think about it from a profitability standpoint..

I just think the channels can actually perform differently depending on the market. So, having the multi-channel strategy can be beneficial, right? So even if one is underperforming, you can actually outperform in the other market..

And then, last quarter, you guys published a table that showed the earnings benefit from rates increasing. And obviously, there's two big moving parts there. One was less amortization on MSRs and the offset was lower income from the origination business.

Just curious, as we've actually seen interest rates rise about the level of magnitude that you had in that chart, is there anything that you feel like has changed versus those numbers, which I think showed an overall $0.18 core earnings benefit on either the MSR side or the origination side. .

We haven't seen the benefit from an amortization standpoint in the first quarter. While we've seen gain on sale of margins come in, and overall origination, profitability will be lower as we as we go forward, at least, that's our guestimation right now, the MSR assets should go up and you will get more cash flow.

Because when you look at the refinancing markets, they're probably off 30 plus percent. Baron gave a number. We're down 20% or 25%.

But I think from an industry standpoint, and this has been published by a number of our friends and peers out there, as they've reported, there's going to be less refinancing activity which will lead to higher valuations and MSRs.

The one difference, I think, where we are today versus if you roll back the clock a few years ago where we didn't have as many agency securities, in the first quarter, agencies widened a little bit, then came back. While rates are up, the absolute value of that mortgage asset on the agency side is a little bit lower.

So, that impacted, from us, overall book value a little bit, and we have hedges against some of our agency securities as well. But as you go forward, I think you're going to see that real lift when amortization slows down. And I think from an industry standpoint, we expect amortization to slow down by about 30% as we go forward. .

And our next question will come from Henry Coffey with Wedbush. .

Just to continue with what Trevor was asking about.

In terms of really watching where your amortization rates are going, is it as easy as just kind of checking the pull factors every month and seeing where agency speeds are? Or are there other issues that we should be looking at?.

We've been pretty vocal in the past about our credit impaired portfolio. We still think that the amount of – we have a $515 billion portfolio of MSRs. We think that the eligible population of that is about 30% for refinancing right now. We're in the money.

The government came out with some new programs where they're going to try to increase the origination to folks that haven't been able to refinance in the past. We'll see how that is. And really, the impact on our portfolios, we don't think it's material. So, I think part of it, Henry, is the factor.

The other part is, I would just say 30% right now, and as we go forward monitoring rates and mortgage rates. And we'll try to get a little bit more refined on that.

The other part about that is, with the NewRez team increasing their recapture percentages, probably more, I guess, into the mid-20s now from when we were in the teens, you look at the job that Sanjeev and his team have done at Caliber from a recapture percentage and north of 50% on a number of their channels. We do think amortization will slow down.

And we look forward to much higher marks on our MSR portfolios, higher book values and higher earnings as we go forward towards the latter part of 2021..

And you are in many respects hedging the MSRs with agencies. So, is the real contribution going to – not on a one to one basis, but there's some of that there.

Is the real contribution from the MSRs going to be related to amortization and sort of total yields or how should we be thinking about it?.

Well, it's kind of both. We have, give or take, $14 billion or $15 billion agency mortgage position. Some of that has to do with compliance from a REIT perspective and compliance. Against that, we have a material amount of swaps where we have payers on against that, meaning that we're effectively hedging out our agency book. So net-net, we're short.

So, an increase in rates will lead to higher MSR values, obviously. That will lead to a positive P&L on our swap book and a lower P&L on our specified book. And you saw a little bit of that play out in the first quarter when you look at swap P&L up, agency mortgage P&L down and then the MSR P&L up..

And then finally, you haven't been excited about investment opportunities in a long time. I think the bargains were back in March which didn't really matter to anybody as we all kind of tried to rectify books.

How much of the recently raised capital is going to go into the new investment opportunities, like single family rental, and how much is going to be just retained for ultimately going into the Caliber transaction?.

I think the way that all of us or the way that we think about the world, we will have higher amounts of capital on our balance sheet at all times. To your point, Henry, we've been pretty vocal that the investment opportunities have not been great. They're not great right now, by any means.

When I think about the engine that we have here, again, with the Caliber folks, we could produce a lot of product. The product with the GSC footprint pulling back a little bit, that's going to create some really interesting opportunities for us. We're already seeing that now. Obviously, the EBO stuff has been pretty fruitful.

We have never been extremely large Ginnie player, however. So, some of our friends and peers out there have had better results in that space.

But we're going to be patient, we're going to have plenty capital on hand at all times to take advantage of what we think is going to be a higher rate environment, and at some point, give us the opportunity to deploy capital away from our operating business.

And then, thinking about the MSR business, for example, there will be higher capital requirements put on all, I think, mortgage originators as we go forward. So, what's the result of that if gain on sale margins continue to contract, which is very possible? There will be sales of MSRs.

And we think that the REIT itself is poised to benefit from that as we think about higher rates, higher capital needs and lower gain on sale..

Can you tell me something about the single family rental business? Is that an operating business? Or how is that going to work?.

Yeah, it's small for us. Now, we have about 1,100 homes. A lot of that is funded. We work with a third party, who's really our operator. We're in certain markets. We're currently in 15 markets. The top markets for us are Atlanta, Houston, Florida. And we're doing some stuff in Mississippi. So, it's small now. We'll monitor home prices, quite frankly.

This is not just to buy homes to buy homes. I think our early acquisitions in this business have been good. Our performance has been good. Right now, I think our average cap rate on this stuff unlevered is about 5.5%. We have good financing on it. So, we'll see how it goes. But we expect it to be a real business as we go forward.

We think the shift in the United States with home prices continuing to rise in certain markets, very good on the rental side. We're pretty excited about that. We have a good team that's really allocated to working on that business. .

And our next question will come from Bose George with KBW. .

Actually, I wanted to go back to the questions on the gain on sale margin. I think, Baron, you noted that the TPO margin is now sub 100 basis points.

Where was that, like, last quarter and the fourth quarter?.

Last quarter, we ended – it was basically double that into the end of last quarter, close to 200. And then, I would tell you, basically, at the end of the third quarter, you're almost another 100 basis points above that. So, you really dropped in about 100 basis points per quarter. .

Can I get an update just on the book value quarter-to-date? And then, just a related question, on the MSR marks, we did see like some other companies take some pretty big MSR marks.

So, I was wondering, if I look at your MSR portfolio versus the others, does the lack of – or the lower prepayability for part of it sort of make the market a little more subdued versus the peers?.

Let me start with the mark. We expect to see marks to increase on that portfolio fairly dramatically as we go forward. When we saw the high levels of amortization, I think March even came in a little bit higher than people expected. Prepayments in March were about 18% faster than what people thought. I think part of that is a date count thing.

But, overall, as we speeds come off, and again, we do think they'll be 30% slower as we go forward, this is really going to be a big deal for us because this is what's going to lead to higher core earnings as we go forward. So, marks will go up and that'll help our book value, obviously.

But I think really, as we think about getting back to much higher core earnings on a go forward basis, that'll start to kick in, we hope, in the third quarter – third to fourth quarter of 2021. Regarding book value, Nick's here.

Nick, why don't you just walk through some of the adjustments in book value?.

Bose, from quarter end from a performance standpoint, book value is relatively unchanged. The one thing you need to factor in is the additional share issuance. So, that will bring our book value down by approximately $0.15. .

And our next question will come from Eric Hagen with BTIG. .

Maybe another one on the MSR and just the framework for how to think about that valuation. When we look at the MSR value at the end of 2018 as maybe one good proxy for when speeds were basically at their lows, I think the MSR was carried at a multiple of around 4.

And so, when we think about the sensitivity going forward and sort of the overall upside that I think you note in the presentation, is it right to think that you guys can get back near that valuation more quickly? Or even exceed that value from 2018, that 4x kind of area because you have a more robust recapture framework now.

Or is there something else that could drive that?.

It's a really good question. I think if you go back to 2018, the product mix we had on our balance sheet at that time was very, very different than where we are now. So, when you think about – if you're originating, I think our gross rate in the first quarter was 2.79 or something like that. That's a newer production MSR.

If you think about that MSR today, it's probably a 4.25, 4.5 multiple. If you think to the old days, going back to 2018, we probably had more legacy MSRs, so at a 4 multiple.

So, I think the way to think of us going forward, as there's more production in these lower rate mortgages that were originated going back to the fourth quarter and the first quarter of respectively 2020 and 2021, those will go up a fair amount more than that 4 multiple.

The legacy stuff will go up, but not as much just because you have more seasoning on it. So, getting back to that 4 multiple, is that doable? Absolutely. Do I think it happens today? No. Will it happen over the course of the year? I think it's very likely..

I think NewRez issued some securitized warehouse funding last week.

Can you talk through some of the deal economics there and how it compares to bank warehouse funding right now? And separately, did you guys say how much origination volume Caliber did last quarter?.

On the Caliber front, we did not. But I think the way to – I spoke to Sanjeev. Obviously, we talk all the time. On the Caliber side, I would expect their origination volumes for the year to be something comparable to what they were in 2020.

So, when you look at that page, it's give or take about probably $70 billion to $80 billion, something in that range. In 2020, it was $80 billion. So, that's on the Caliber side. On the warehouse side – I'll let Baron talk to some of the math around it.

Our goal – and this will continue to be as a company – will be to limit the amount of real exposure we have to any one counterparty as we think about our business going forward. So, the more stuff that we put out in the capital markets, the better our business becomes.

I think in a couple of the prior quarters, we were extremely vocal about getting away from real mark-to-market. This does have mark-to-market provisions. The mark-to-market provisions on this stuff are better, but the cost of funds and the advance rates are actually better versus bank funding. So, Baron, I don't know if you want to add anything there..

The real key here for us is that we're able to obtain three-year committed warehouse financing, right, at a very cost effective rate, cheaper than what we get from the banks. Right? And that, I will tell you, especially with my prior background, is very, very attractive and accretive for our platform.

And in the context of doing capital markets transactions, as Michael talked about, it's a little bit more favorable than how we benchmark our bank financing. We are always still going to have bank financing there. Those are important partners to us.

But to the extent that we can diversify and obtain three-year committed financing, we're going to look to try to do that..

And our next question will come from Kevin Barker with Piper Sandler..

You mentioned your funded volume is going to be down slightly quarter-over-quarter and in the second quarter, partly due to the decline in refinance demand for direct-to-consumer.

What other channels are you seeing a little bit of pressure there on volume, recognizing that pull-through adjusted locks were only up 4% quarter-over-quarter?.

We look at each channel from an overall return perspective as opposed to necessarily focusing on volume. On our direct-to-consumer, we're very much focused on recapture right now. And we still have a significant number of consumers that are in the money.

I think that, as Michael I think in prior quarters talked about, the in-the-money calculation of consumers that can save $100 a month. We still have approximately a million consumers in-the-money for us today at today's interest rates.

So, we do look at the context of our direct-to-consumer franchise having continued upside and growth as we expand into that new customer acquisition. Our JVs are definitively going to see refinances slow down. And we've seen that already as talked about, but that's a purchase business with our partnerships with realtors across the US.

So, it's really just a more of a matter as to how we're maximizing our ROE through our third-party channels, including wholesale and correspondent. And at this point, we still believe the correspondent business is accretive to our franchise. And we look opportunistically at TPO and we talked about non-QM..

The other thing, Kevin, on that front is – from a volume perspective, and I know everybody always talks about volume, we care about making money. And so, if we do less volume and we make more money, that's really where we're going to shake out.

The other thing is, when you think about the spread compression you're seeing in the correspondent business, which is – you go back to the old days, that's a good MSR creation vehicle for us if we believe rates are going to go up. So, when we think about the amount of volume we do there, essentially, you're buying in a closed loan.

So, that's something that we'll continue to monitor, one, from a P&L standpoint, but, two, from a market direction standpoint as we think about the overall rate market..

And then, several of your non-bank competitors have continued to build capacity and look to continue to take market share as we move through this year. And it seems like we're definitely seeing lower demand.

What gives you confidence that the direct-to-consumer channel can maintain gain on sale margins at 2019 levels with that type of dynamic where capacity is still building? And 2019 was a relatively good year when we look at post-crisis mortgage origination profitability..

So, one of the reasons we did the Caliber transaction, one is, it's a great company. Two, they have obviously a great leadership team and what I refer to the so-called thundering herd. So that purchase market is going to be something that's really important to us.

It's not – when we think about real volumes and we think about real P&L, you're going to see a lot more efficiencies, I think, around the technology side. We have a lot of initiatives that we're currently working on, getting loans closed quicker. And when you talk about sheer scale, I do think the mortgage business is here to stay.

It doesn't mean people are going to do anywhere near the same volumes as we go forward because if refinancing volumes continue to go down by 30%, at some point, if the housing market rolls over a little bit, volumes are going to come off pretty dramatically. And I do think you see margins squeeze. Think about our business.

We have 500 plus billion of MSRs. We are so perfectly situated to actually take advantage of virtually a very low velocity origination market as we go forward. That coupled with, I think, the recapture rates that we have both on the NewRez side which are growing and what Caliber has done on their side – you'll see lower volumes.

I do think the mortgage business is here to stay. I think the valuation of the mortgage companies, whether it be us or – we always think we're undervalued, honestly. But when we think about other peers out there, whether it be Jay and Cooper and David and his business, it's here to stay.

And we all know that the mortgage business is episodic as it relates to P&L and flows. But it's a real product. It's a huge market. It's a multi-trillion dollar market. And so, volumes may come off, P&L may come off, but long term, it's here to stay. And I think everybody having capacity is going to matter..

And our next question will come from Guiliano Bologna with Compass Point..

I guess from a little bit starting point, one of the areas I was curious to get your input was, when we looked at the Caliber transaction, I think they had a little bit over $1.4 billion of MSRs towards the end of February. It was a little bit over $1.1 billion at December 31. I was curious about two different things there.

One, do you know if those numbers include any recapture assumptions or if those are pre-recapture? And then, the second part of that is kind of twofold. But when you bring on – if you were to merge the two entities, Caliber's recapture performance is pretty impressive, and that could obviously lift your recapture performance over time.

May not be immediate. But that could push your recapture assumptions higher over time for your core portfolio, which could be accretive. And also, the Caliber portfolio itself may also get some embedded recapture benefits, assuming the transaction closes and the transaction happens.

The way that I calculate that is that there could be $150 million plus of additional upside, if not more, for the Caliber portfolio before any kind of tack-on benefits to your core portfolio. And that could more than offset all the dilution from the secondary.

Is that a good way of thinking of it? And am I going off in the wrong direction there?.

I can't ask you to repeat that question. Why don't we start with the Caliber portfolio? The Caliber portfolio, when we quote the $140 billion, that's as of the end of 12/31. So, the way the transaction works, it's a closed box. So, once it closes, we get all these so-called assets from a balance sheet perspective.

The $140 billion, there's no formula that's put into that recapture percentage as it relates to that $140 billion, just so we have that.

As you think about Caliber and if Caliber does, call it, $75 billion to $85 billion of production and you have to assume some kind of amortization rate and recapture rate, the net of that will be – that's what our MSR portfolio will be.

We think as we integrate and bring both companies together and the transaction closes, the lift that our overall business will get from, quite frankly, both sides and the recapture percentages going up are going to be significant from an income standpoint on our overall earnings for our company profile. I don't know exactly what that is.

I think when we announced the Caliber transaction, our goal is obviously to make as much money for our shareholders as possible. It is highly accretive, we believe this transaction. But I don't want to short a specific number. I may have done that in the past, if you go back and listen to some of our other calls.

But I see no reason why we won't get back to a much higher earnings stream..

That makes sense. And I realize that question is very convoluted. What I was curious about, which maybe a little bit different direction was, the book value impacts and, post-merger, if there any benefits of adding higher recapture assumptions into your MSR fair value analysis, that could push your MSR values up.

And also, similarly for the MSRs that would be coming over on the Caliber side essentially those assets moving higher. .

We haven't changed any of our book value assumptions related to any lift we're going to get on any recapture from the Caliber franchise at all.

One thing, and Nick pointed out, and just when you think about book value today and as we think about the second quarter, so everybody can model this correctly, why don't you just share your $0.03 thoughts?.

As I mentioned to Bose earlier, the expectation is there's that approximately $0.15 dilution on book value related to the share issuance. In addition, the impact on core earnings is going to be a dilution of $0.03.

And as Michael mentioned earlier, in terms of book or anticipated book, we haven't factored in any lift from factoring in recapture into the Caliber mark..

And our next question will come from Mark DeVries with Barclays. .

You highlighted the opportunity in non-QM originations. That market has been really slow to develop ever since kind of the whole QM framework was created.

Can you just talk about what's limited the growth of that market, what you think may be changing to make that a bigger opportunity, how big you think it could be for you? And then finally, kind of how the returns for that may stack up to originating QM loans, particularly kind of in light of the fact you just don't have the same kind of legal safe harbors?.

The reason it hasn't started up is the industry is short, quite frankly, capacity. The combination of the two companies will give us the capacity we need. The other thing is, when you think about the nature of the origination market in 2020 with so much production on the agency side, there was not enough folks, quite frankly, to process non-QM loans.

As you think about refinancing volumes coming off and the need for what I would call non-QM product, a non-government guaranteed product, we expect it to be a pretty significant part of our business. Caliber has been there before. We've been there before. And, Baron, I think, alluded to $125 million a month.

I'm looking at him and thinking, like, that's very low. So, we will try to grow prudently around that space. But it's really – the governor has been the ability to process loans and capacity. From a profitability standpoint, it's a pretty profitable business. I think, in our debt, we alluded to an asset sale of $750 million of loans.

We've called some deals where we issued in the past, and dollar prices on those assets have been 106, 107, something around that range. And if you go back to the COVID crisis, those couple tough weeks for us and others in March, those ones were trading, give or take, $0.90. So, you've seen, obviously, a dramatic recovery in pricing.

That'll help drive I think more production for us, us having the capacity, the great so-called retail network on Caliber, as well as us, we want to get these products out as soon as possible. And I think it's really going to be a good profitable business for us..

Do you see that as also being an opportunity to create some credit assets for the REIT to hold?.

Absolutely. One of the things, if you think about even Sanjeev and his management team, they come from a consumer banking background. There is no reason why we shouldn't be able to think about – and we're working on this now – a OneMain type business. Obviously, we'll be evaluating different credit profiles.

But there's no reason why we shouldn't be able to roll out different products into the marketplace through the Caliber retail network, as well as on the NewRez side. We have a great sales force on the NewRez side..

Just one last for me.

As you think about the opportunity to do more bulk MSR acquisitions coming back as originator gain on sale margins compress, what kind of returns do you think you'll be targeting for those acquisitions?.

We have to be thoughtful. Obviously, we have a huge production machine when the two companies come together. So, we're mindful of that. We've always been out there saying, give or take 8% unlevered. And I think we'll probably stay with those kind of numbers. With proper financing, you're in the double digits. So, that's part of it.

The other part to think about is we are in the middle of an acquisition and we have to think about balance sheet and governors and our friends in DC and how we think about capital. So, there's some things to think about there.

But we want to be in a position to be supportive of, one, the industry, but, two, obviously, taking advantage of any opportunities that come our way around MSR sales..

This will conclude our question-and-answer session. I'd like to turn the conference back over to Michael Nierenberg for any closing remarks..

That's all I have. We appreciate everybody's time this morning on the call and questions. Any follow-up, give us a holler. And look forward to producing good results for our shareholders as we go forward. Stay well. Have a great spring. And I will talk to you soon. Thanks. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time..