Earnings Transcript for HMPT - Q4 Fiscal Year 2021

Operator: Good morning, and welcome to Home Point Capital's Fourth Quarter 2021 financial results call. During today's presentation, all callers will be placed in a listen-only mode. And following management's prepared remarks, the call will be opened for questions. Please be advised that today's conference call is being recorded. Please go to the IR website to obtain the earnings materials. I will now turn the call over to Ginger Wilcox, Head of Investor Relations at Home Point Capital. Thank you. You may begin.

Ginger Wilcox: Thank you, Operator. Welcome to our Fourth Quarter 2021 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, which was filed on March 12th, 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 earnings release, which is available on the company's website. I'd now like to turn the call over to Willie Newman, President. Since and Chief Executive Officer.

Willie Newman: Thanks Ginger. And good morning, everyone. During my prepared remarks, I'm going to briefly review our results for the fourth quarter and year ended December 31st, 2021. I'll also talk about the key focus areas for our business 2022 as we navigate through what we believe will be the most challenging part of a mortgage cycle. After that, Mark will provide more details on our results, as well as insights into what we're seeing so far in the first quarter, we'll then open up the call to take your questions. In the fourth quarter, we generated funded origination volume of $21 billion compared to $24 billion in the fourth quarter of 2020 and $21 billion in the third quarter of 2021. For the full year 2021, we generated record origination volume of $96 billion, which is a 55% increase over 2020. Our origination volume was propelled by the strong expansion we made to our partner base throughout the year. In the fourth quarter, we added 560 new broker partners, and in total for 2021, our third-party partner relationships increased by nearly 50%. We ended the fourth quarter with more than 8,000 broker partners and 676 correspondent partners. Our new broker partners represent a significant opportunity and provide us with a springboard for market share growth in 2022. [Indiscernible] in our servicing portfolio, we ended the fourth quarter with nearly 426,000 customers, which is up 22% year-over-year, and down 1% from the third quarter. As Mark will discuss shortly, during the fourth quarter, we completed a Ginnie Mae, MSR sale with approximately $175 million in proceeds. Even with MSR sales, our total balances grew 45% to $128 billion during 2021. As discussed last quarter, we are evolving our servicing strategy by more actively managing and strategically monetizing the value of our MSR assets. The liquidity generated will be used to strengthen our balance sheet by reducing outstanding debt and for investment in our partner experience. From a financial perspective, in 2021, we recorded total net revenue of $962 million and net income of $166 million. Notably, even with the challenges presented in 2021, we generated a 21% return on equity comfortably above our 15% minimum target. In the fourth quarter, we generated total net revenue of $181 million and net income of $19 million or $0.14 per diluted share. As we have discussed previously, there has been significant pressure on margins, particularly in the wholesale channel. Additionally, interest rates are rising, which has put pressure on mortgage origination volume. To offset some of that margin pressure, we continue to accelerate our efforts to deploy new technology that will lower costs and improve the efficiency of our operations. In the fourth quarter, we made meaningful progress in expense management with a $23 million reduction in a direct origination costs versus the prior quarter. Looking at 2022, the mortgage industry is entering a challenging part of the mortgage cycle, with higher rates leading to a shrinking refinance market while industry capacity remains at an all-time high. We're focused on navigating through this downturn while continuing to enable future growth. As such, these are Home Point's priorities. Liquidity, we have thoroughly evaluated our balance sheet and are monetizing non-strategic assets at attractive levels. As previously noted, these proceeds will be primarily used to reduce leverage, improve our financial ratios, and create headroom for future growth. Rigorous cost management. We have continued to reduce our direct cost to originate. In addition to our recently announced relationship with ServiceMac, we expect to transition our servicing platform to a lower variable expense construct. This also provides flexibility for active MSR management. Additionally, we are in the process of executing a zero-based cost review of our corporate functions. Finally, we will continue to invest in the most significant growth opportunities, and be well-positioned to grow our wholesale market share. We strongly believe that efficiencies driven by the broker wholesale lender partnership will accelerate market share growth in the channel. with regards to liquidity, we have agreements in place to sell MSRs and other non-strategic assets which are expected to generate proceeds in excess of $700 million. These sales are anticipated to close in the first and second quarters of 2022. On the expense side, we have been aggressively managing costs and origination since early 2021. In a sense, the competitor driven dislocation in wholesale benefited us, and forced us to look closely at costs before the overall market started to contract. This gave us a head start and we intend to on leveraging that momentum as others are just starting to cost management process specific to servicing as noted, we have entered into an agreement with ServiceMac to manage our servicing operations. Servicing is very much a scale business. And as we transition to active MSR management, it became evident that the most effective way to get the advantages of scale was to partner with like-minded operator. For Home Point, the result is lower and variable costs with the benefits of a growing platform invested in capabilities. Additionally, ServiceMac will take on our servicing associate, which will both enabled the transition and provide for continuity with our customers and partners. While we believe the environment requires what may be considered defensive actions, we fully intend on continuing to play offense where we believe the greatest opportunities lie. For us, that means wholesale. As we've seen in previous cycles including 2018 and 2019, a purchase centric origination market creates enormous opportunity for mortgage brokers in the wholesale channel because of the inherent cost advantages created by the alignment between brokers and wholesale lenders such as Home Point. This in turn, drives more officers to brokerages, which fuels markets share growth in the wholesale segment. According to select 2020 HMDA data, the rates and fees offered to consumers through the top ten wholesale lenders as compared to the top ten retail lenders, resulted in a $2600 average benefit to consumers. More recent securitization data, is supportive of this advantage for consumers ongoing. This is a compelling benefit that will become even more valuable, as interest rates rise and affordability increasingly becomes an issue. The last time interest rates rose materially, starting in 2018, the number of loan officers joining brokerages increased by 28% in the following year. We expect to and even greater rate of growth in 2022. At Home Point, we have strategically built our business for this type of cycle with our focus on the wholesale channel. Mortgage brokers have strong relationships with local real estate professionals, and the partnership with wholesale lenders like Home Point can provide a better experience for the consumer. As rates go up, consumer desire for the lowest possible interest rates, closing costs, and fees will be even stronger, which brokers are best positioned to deliver. In addition, the transition of our servicing operation to ServiceMac will enable the redeployment of technology and process resources to support growth to the wholesale channel, including expanding product offerings and enhancing the partner experience. We're especially focused on growing wallet share with from the over 8,000 partners we are already engaged with. Even considering widely expected contraction in the overall mortgage market, we continue to navigate through the competitive environment as one of the top mortgage lenders in the country. Our position as a leader in wholesale lending, puts us in great position about driving leverage growth in the channel. In summary, we will continue to build on the strengths of our flexible business model to protect and ultimately grow a book value. With that, I'd like to turn the call over to Mark.

Mark Elbaum: Thanks, Willie. And good morning, everyone. Starting with Slide 5 of the earnings presentation, as Willie noted, 2021 was a record-setting year for Home Point, with loan volumes totaling $96 billion. There's no doubt that in the previous two years, we've been the beneficiary of favorable market conditions. And with the financial and process-related strides we've made, we have built a solid foundation from which we can continue to execute on our long-term strategy. Even as interest rates began ticking upward and margins compressed in the fourth quarter, we continued to deliver strong performance across key origination and servicing metrics. In addition, we have included our return on equity results. For the full year of 2021, we showed a return on equity of 21%. Turning to Slide 6, we have provided a summary of our quarterly and annual financial results. Total net revenue in the fourth quarter are $181 million, compared to $275 million in the third quarter of 2021, and $454 million in the fourth quarter of 2020. Our total expenses of $152 million in the fourth quarter of 2021, improved 32% versus the fourth quarter of 2020 and were 13% lower compared to the third quarter of 2021, due to our continued efficiency initiatives. The sequential quarter improvement in expenses was due to reductions of 13% in the origination segment direct expenses, 15% in corporate expenses, and 9% in servicing segment direct expenses. We generated net income of $19 million in the fourth quarter of 2021, compared to net income of a $184 million year-over-year, and compared to net income of $71 million in the third quarter of 2021. On slide seven, we have included a quarterly breakdown of our funded origination volume by channel for the last five quarters. In aggregate, we generated $21 billion of volume in the fourth quarter of 2021, and as mentioned previously, $96 billion for the full year. Consistent with our overall strategy, the wholesale channel primarily drove our origination volume this quarter. Slide 8, includes a snapshot of our origination segment results. Originations segment revenue of $103 million in the fourth quarter of 2021, compared to $456 million year-over-year, and $184 million in the third quarter of 2021. Gain on sale margin attributable to channels before giving effect to the impact of capital markets activity, was 59 basis points in the fourth quarter of 2021, versus 177 basis points in the fourth quarter of 2020 and 73 basis points in the third quarter of 2021. The origination segment contribution margin was $2 million in the fourth quarter of 2021, compared to $304 million in the fourth quarter of 2020 and $67 million in the third quarter of 2021. At the end of the fourth quarter of 2021, our total third-party partner relationships grew by 45% year-over-year to nearly 8700 which represents an increase of over 2700 net new relationships over the last 12 months and 584 net new relationships in the last quarter. On Slide 9, we have provided a snapshot of our servicing segment's financial results. The number of customers in our servicing portfolio was nearly 426,000 at the end of the fourth quarter of 2021, a small reduction from the third quarter due to the sale of a Ginnie Mae servicing portfolio I will discuss in a moment. The servicing portfolio UPB surpassed a $128 billion at the end of the fourth quarter of 2021, rising 45% year-over-year and up 2% compared to the third quarter of 2021. Similar to last quarter, we saw a slowdown in prepayments during the fourth quarter. Which is reflected in the decline in the change in MSR fair value from amortization. Loan servicing fees of nearly $84 million in the fourth quarter of 2021 increased 54% from the fourth quarter of 2020, driven by the growth in our servicing portfolio, and decreased 9% from the third quarter of 2021, due to the Ginnie Mae MSR sale. Before including the impact of the market-to-market fair value of our MSR asset net of hedging, the servicing segment generated what we refer to as an adjusted contribution margin of positive $31 million, which was an improvement from negative $34 million in the year-ago quarter, and from $9 million in the third quarter of 2020. Servicing segment contribution margin for the fourth quarter of 2021, was $74 million compared to a negative $17 million in the fourth quarter of 2020, and positive $86 million in the third quarter of 2021. Our 2021 fourth quarter contribution margin, benefited from a $43 million increase in the market-to-market fair value net of hedge of our MSR asset due primarily to an increase in interest rates during the quarter. As Willie mentioned, the sale of MSR and non-strategic assets along with the recently announced servicing relationship with Service MAC are examples of our ongoing strategy to monetize non-strategic assets and manage costs. During the fourth quarter, we completed a Ginnie Mae MSR sale with an aggregate UPB of approximately $13.1 billion, which represented approximately 77% of our Ginnie Mae MSR portfolio as of September 30th, 2021. The total purchase price for the servicing rights was approximately $175 million. With the MSR sales, we have excess capacity in our servicing operations, which would ultimately have had a notable impact on our cost per loan. By partnering with ServiceMac and taking advantage of their scale, we expect to transition our servicing platform to a lower variable cost and provide additional flexibility to manage the MSR asset. This strategic move also enables us to redeploy resources to support growth in Home Point's origination channel, including expanding product offerings and enhancing the broker partner experience. Turning to Slide 10, we have included a summary balance sheet which highlights our capitalization and liquidity profile. At the end of the fourth quarter of 2021, we had $555 million of available liquidity, while our total assets stood at $7 billion and our book value was $777 million. Our total warehouse capacity remains at $7.5 billion as of December 31st. Home Point Capital's Board of Directors has declared a cash dividend of $0.04 per share for the fourth quarter of 2021, payable to shareholders of record as of March tenth. It has also authorized a stock repurchase program where the company may repurchase up to a total of $8 million of its issued and outstanding common stock. The stock repurchase program expires on December 31st of 2022. Before I finish my prepared remarks, I would like to briefly discuss our financial outlook. As we look at the first quarter of 2022, we are focusing on improving margins. This may result in a greater degree of variance on production. We are also taking steps to protect our book value through effective cost management, which will benefit us in all rate environments. In the first quarter of 2022, we expect to fund between $12 billion and $15 billion with margins in the 60 to 70 basis point range. With regards to our balance sheet, as Willie noted, we have agreements in place to sell non-strategic assets. These asset sales give us a path towards a corporate debt to TCE leverage ratio target of one-times. As to origination volume, we expect to benefit from expanded product offerings, as well as benefit from the expansion in the new partner base we established last year. 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.

Operator: At this time, we will be conducting our question-and-answer session. [Operator Instructions]. Our first question comes from the line of Douglas Harter with Credit Suisse, please proceed with your question.

Douglas Harter: Thanks. Hoping to talk more about the strategic -- non-strategic asset sales, I guess, is that $700 -- it the $75 million of the stake of long bridge and included in that total?

Willie Newman: Hey, Doug, good morning. It's Willie. Yes, it is. So the longer stake and the -- primarily the rest of it at this point are MSR assets.

Douglas Harter: And just on long bridge, can you just tell us where that was marked at year-end just to give us a frame of reference of the $75 million sale price.

Willie Newman: I will turn it to Mark.

Mark Elbaum: Sure. So it was marked at -- it was -- got it to about $62 million as where it was marked at month-end -- or quarter.

Douglas Harter: Got it

Mark Elbaum: If you look at our -- if you go to our balance sheet, you'll see assets held for sale broken out separately because we have a long bridge sale and that would be the long bridge stake at 63.7 actually.

Douglas Harter: Got it. And then I guess the remaining MSR sales, just one -- you talked about which debt you would look to repay and then two, just as you're thinking about those sales, how you think about balancing the trade-off of the cash flows from those servicing on the long term versus kind of the immediate liquidity against you.

Willie Newman: Sure. I'll take the first -- or the second part first, which is if you look at what we're selling, and if you look at the balance afterwards, obviously, we've had a round up in values as well, so we'll still have billion dollar MSR asset after these sales. And so we feel like we will have sufficient balance term for a revenue/cash flow standpoint from the servicing. Mark, you can talk about the debt.

Mark Elbaum: Sure. As for the use of the proceeds, we'll be using it to pay down the debt related to our MSR facility. And the reason we think that's a good idea is because that gives us liquidity that we can redraw as we -- to Willie's point to add more MSR to our new production we'll have the ability to use that facility and continue to use that to fund our MSR growth. And should we choose to strategically sell MSR, then we would then pay that down. So it becomes a working capital line in that respect.

Operator: Our next question comes from the line of Kevin Barker with Piper Sandler, please proceed with your question.

Kevin Barker: Good morning. Could you outline the anticipated cadence of MSR sales? Is that all going to happen here in the near-term, or is that going to happen over a few quarters to get to that billion-dollar balance number?

Willie Newman: Hey, Kevin, good morning. It's Willie. So that will happen in this quarter and the next quarter, the $700 million that we've outlined.

Kevin Barker: Okay. And then those have all been mark-to-market, it's a fair value at this point, right? So real no big gain or loss on that, is that right?

Willie Newman: Yes. Go ahead Mark.

Mark Elbaum: No that would be right. That -- it's basically going to be at fair value.

Kevin Barker: So. Rates have been up quite a bit in the first quarter. Do you -- what's the -- how much of your -- how much is your MSR marked up quarter-to-date. Just given the moving rates so far.

Willie Newman: Mark, do you want to take [Indiscernible]

Mark Elbaum: Sure. That's not typically something we disclose. And furthermore, whatever answer I'd give you today will be wrong tomorrow given what's happening with rates right now. So stay tuned. We'll be keeping an eye on that as well.

Willie Newman: I do you think the important things to help everyone understand is that, obviously, valuations have gone up substantially. We've been able to monetize a meaningful percentage of that valuation run up. So we feel really good about the position that we're in both with regard to monetizing asset and then the asset that will continue to hold.

Kevin Barker: Yes. Because we've seen markups somewhere between 10 or 15 basis points for some of the others that have reported so far. I'm just wondering if that's also going to be supportive of book value going into the first quarter, just given everything that's going on. And then just you announced a buyback, $8 million, but your debt is also trading and a fairly steep discount to par. Can you outline why you feel like it makes sense to buy the equity versus debt right now? Because you are delivering, and so you're targeting lower better capital ratios. Why not just buy the corporate debt to net today with yields in the double-digits?

Willie Newman: So we feel like the -- having that debt out there at the rate that we have that is worth us maintaining. As Mark said, we'll pay down the debt that is more operating in nature. As far as the equity goes, right now, as you know, we're selling in the neighborhood of 65% to 70% of book value and we feel like that's a tremendous value. Anytime someone wants to sell me a dollar for $0.65 or $0.70, I'm going to look at buying them.

Operator: Thank you. Our next question comes from the line of Brock Vandervliet with UBS, please proceed with your question.

Brock Vandervliet: Good morning. Thanks for the question. Appreciate the disclosure on gain on sale by channel on Slide 14, can you talk about gain on sale dynamics and where you see that in the pipeline by channel?

Willie Newman: Yes. Hey, Brock, it's Willie, I'll start. So we've changed our perspective a little bit on how we're managing again, sale or become more specifically margins. And because the environment is so challenging, we're really looking at how we can move margin up, which I know it sounds a little bit counter intuitive, but we're willing to let volume fluctuate a bit more than historically we have in order to push margins up. So we're trying to establish really a cadence where we move margin up over time. Mark if you want to talk a little more specifically about that.

Mark Elbaum: Sure. So Brock, we talked about margin of margin forecast for the first quarter being in the 60 to 70 basis point range. And that would be related to the 58 basis points that we showed on Page 14. So it is creeping up a little bit from there. And then between seasonality, higher rates as well as our willingness to get more margin, we're expecting our volumes to be in the $12 billion to $15 billion range, and that would be down from about $20.5 billion this quarter. So anyway, that's hopefully helpful in terms of where we're seeing margins.

Brock Vandervliet: Yeah. Just as a follow-up, I hadn't heard that guide. That's interesting. How are you able to drive that higher? Because I would think there would be loans and pipeline that are underwater relative to mortgage rates. And that might further pressure gain on sale. How are you seeing the increase there for Q1?

Willie Newman: Yeah. Hey, Brock. It's Willie again. So I say a combination of improving our analytics and how we price, specifically around our partners on the wholesale side, and then just greater degree of discipline around the price. So as I said, we're willing lead volume fluctuate a bit more than we have historically in order to accomplish that. But we think, in the long run, that's a better position to be in.

Operator: Thank you. Our next question comes from the line of Rick Shane with JPMorgan, please proceed with your question.

Rick Shane: Thanks everybody for taking my questions this morning. First thing, my understanding is the guidance that you just provided is in terms of funding for the first quarter. Funding is a partially forward, partially backward looking metric, given the locks. What is the outlook for locks during the first quarter, given that that's really what the gain on sales calculated off?

Mark Elbaum: Sure. Good question and yes, the answer is I would give the same guidance, $12 billion to $15 billion, both for funding as well as for locks.

Rick Shane: Great. That's helpful. Thank you. And then the other question I have is, if we look at the MSR mark, its you're carrying those MSR currently -- I apologize. I want to say it's $119. If we look at where the portfolio was sold in the fourth quarter, it was sold at $134, and it was carried at $111 when we think about the sales that are coming over the next couple of quarters, is it fair to expect them to be closer to that $134? I know in response to Kevin's question, you'd said you didn't expect any additional gains, but it does seem like there's a little bit of a gap there that could be profitable.

Willie Newman: So I would say that the fair value has migrated closer to where the execution was. We really did get extraordinary execution on those Ginnie Mae sales. So I wouldn't expect that, the -- certainly that level of spread ongoing. And as you know, overall, values have migrated up. So as Mark said, expect closer to fair value on the execution, but we still feel like especially with, the run-up, we're getting strong execution and we have a lot of interest in our products.

Operator: Thank you. Our next question comes from the line of James Faucette with Morgan Stanley, please proceed with your question.

James Faucette: Great. Thank you, wanted to ask as the interest rate environment is changing your looking at kind of the composition of that market. Can you give us a sense of what's happening with the contribution from things like cash-out refies? And then what have you been seeing in terms of purchase volumes in -- since the beginning of the year as interest rates have moved up?

Willie Newman: Hey, James. Obviously the composition has changed substantially from a refinance standpoint, we see about 65% of our refinances to be cashed out at this point, which is obviously extremely different mix than what it was just last quarter. Purchase standpoint now we're migrating over 50% of our flow is purchased. And I'd say that the activity is a little bit muted in part as you know, because of the supply challenges overall in the market. We do believe that there will be some increase from seasonality, but it remains to be seen how much that will be based on the supply challenges that we're seeing.

James Faucette: Thanks. And then you mentioned quite a bit taking advantage of the time to invest in capabilities and growing the broker channel, I guess I just have a couple of questions or like how you're balancing investment, what you're focused on, are you undertaking new technology initiatives? Firstly. And secondly, what are you expecting in terms of churn of brokers as we go through the cycle, obviously you've been through Cephalon adding those, but are you going to have to increase the spend around making sure that you secure new brokers. If there's a higher array, right, reare -- excuse me, rising level of churn.

Willie Newman: Right. So it's really a question. So from a technology process standpoint, it's really the same path that we've been on previously, which is specifically on the technology side, continuing to implement our load code componentized technology, I'll say, across the origination process. You'd probably better side across the operations processes for the organization. So that's, I'd say, is more status quo. One of the things we are able to do because of the ServiceMac relationship is to move resources that we formerly had focused on our servicing operation, and focus those on the origination side, specifically in wholesale. So that should give us an additional boost both from a capacity standpoint and optimally speed the market as it relates to the broker market overall, I think you saw from our remarks that we really look at the cycle very similar to and we believe even more significant than 2018, FY '19 when you saw rates up, you saw the benefits of wholesale in alignment between wholesale lenders and broker partners bear out. And as a result, there is a significant inflow of loan officers into the broker space. So I would say the churn element for us. We have significant opportunity to the 8,000 partners we've already signed up, we believe the number of, I'll say, partner opportunities will grow more materially than it has a previously, and it's been on a nearly 20% growth half over the last couple of years. So we're more -- we're focused at this point on expanding relationships with those that we have in the fold and then expanding the market overall.

Operator: Thank you. Our next question comes from the line of Steve DeLaney with JMP Securities. Please proceed with your question.

Steve DeLaney: Good morning, Willy and Mark, one of the things that hadn't been touched on yet that I think a show some progress as your corporate expenses looks like they fell $6 million to $35 million in the fourth quarter. Is there further room for efficiency and process in that line -- that expense line?

Willie Newman: So Mark, why don't you take that one?

Mark Elbaum: Sure. So as Willie mentioned, we are conducting a zero-based budgeting exercise, which is going to be frankly across the entire company, but certainly that'll impact corporate. And it's I think just good corporate hygiene, especially as we are looking at volumes and margins dropping. So just reassess everything and this is a journey we started back in the second quarter and we'll continue. So we're doing that analysis to make sure we have the right balance of what we need versus what's nice to have. And we will be looking at opportunities there. So I'm not prepared to tell you exactly what our targets are, or where we're going with that. But I'm certainly optimistic that we're going to do a thorough review of that and get that to the right level.

Steve DeLaney: Okay. In my follow-up, we had -- Doug mentioned long bridge. We noticed that last night as well in looking at Ellington. It sounds like with your being selective to selling down the Ginnie servicing to selling your interest in remaining interest in long bridge, that you really looking at the business and trying to be really focused on your core wholesale business, and maximize that. Are there any other tangential equity investments or affiliates attached to Home Point that might also be divested of going forward?

Willie Newman: Yeah. It's Willie. We do intend to look at potential opportunities within the balance sheet.

Steve DeLaney: Okay, so there's some other non-core, I guess is the way I would describe things that you may not be interested in identifying or being specific about, but we could see this type of activity going forward is what I'm hearing you say.

Willie Newman: I think it's kind of interesting doing this call today based on what's happened over in Ukraine but I think then the business realign kind of venture a lot of cycles and to me where we're focused, which is one, as I said, liquidity. And getting as liquid as we can get in a volatile environment. I think there's no better place to be than being liquid. Q is being laser-focused on the cost side and again, having been through a lot of cycles, I think a lot of folks trying to use hope as a strategy to hold onto their costs and as Mark indicated, we're being we're being very focused. It's Dan and very deliberate about what is necessary for us to continue to carry on what's important. But at the same time, number three is investing in where we see the greatest opportunities. And as you identified Stephen, as historical trends have shown and current trends are starting to indicate the wholesale segment is really worth that and especially for us the way we are positioned, so that's where we're going to be focused.

Operator: Our next question comes from the line of Mihir Bhatia with Bank of America, please proceed with your question.

Mihir Bhatia: Good morning. And thank you for taking my question. I want to us maybe to start just on the service Mac announcements from a few weeks ago. I guess, maybe just help us understand is there a way to quantify what the cost savings will look like and how that will change your -- I guess -- does it change your strategy in any way. I'm thinking particularly on the direct side site, now that you have to go through [Indiscernible]

Willie Newman: So Mark why don't you talk about the cost piece and then I'll come back to the strategic part?

Mark Elbaum: Sure. So as we're looking at our MSR asset as more of a strategic asset and doing sales, had we kept the platform in-house, that would have created on number of operational challenges, not the least of which is that we would have excess capacity on that platform, and our per unit cost would have risen. What the ServiceMac relationship enables us to do is to continue to have the same level of service to our customers, keep our employees, they're going to move over to ServiceMac, and then convert that cost to a variable cost at a lower level. So it enables us to keep more consistency on a per unit basis rather than what would have happened, which is our cost might have stayed flattish in the aggregate on a notional basis, but our per unit would've gone up quite a bit. So that's the benefit of it. You will start to the now our servicing portfolio costs, across the service have risen up and rise down depending on how much servicing we choose to hold. So we've converted a -- a fixed cost to a variable cost at a lower level.

Willie Newman: As it relates to strategically specifically around Direct. I mean, obviously direct is now a different dynamic based on the interest rate environment. But that said, one of the benefits -- many benefits are working with ServiceMac as the continuity with regarded our associates in the servicing function. And with that, the ability to maintain the workflow between the two organizations as it relates to customers who are interested in a new origination with Home Point is there. So we'll be building those workflows in conjunction with ServiceMac in a way that will continue -- our customers who continue to have a great experience they had when it was one entity

Mihir Bhatia: Got it. Thank you. And then just -- the other question I had was just around margins and maybe looking just at the fourth-quarter, came down a fair amount. Is there any way for us or even for you maybe to disaggregate how much of that was just driven by interest rate movements versus maybe competitive intensity? I guess the real -- the question I'm trying to get out there, just trying to understand how much is competition, like, what does the competitive intensity like is did it increase in the fourth quarter? That's what drove margins lower. Just trying to understand the dynamics.

Willie Newman: yeah that is a really good question. I'd say the short answer. There's it's really hard to discern, but generally, it was really more of the origination environment. With seasonality taking hold in November and December, there were just last ones to go around and as I mentioned in my earlier remarks, the industry will really hasn't shared much capacity at this point, so that ultimately puts pressure on margins you have or origination's in the have a lot of capacity out there. So as Mark indicated, that's why we're being very proactive from a bulk capacity management standpoint, technology and process standpoint, but certainly overall from a cost perspective.

Operator: Thank you. Our next question comes from the line of Kevin Barker with Piper Sandler, please proceed with your question.

Kevin Barker: Thank you. Just a follow-up on some of the servicing questions that are already asked. Your costs, your servicing operating expense as a percentage of the overall UPB has been cut in half. In the last like six quarters. Do you expect the servicing operating expense to remain relatively flat from the fourth quarter levels when measured against the total UPB outstanding, or would that be embedded in the MSR? From Mark given your cost of service could change and change your value of the MSR.

Willie Newman: Mark did you write that down?

Mark Elbaum: Sure. Yeah. So good observation. We certainly made a lot of progress in lowering our internal cost to serve as a result of building scale as well as some of the moves we made with respect to moving off Ginnie Maes. So that's what created that. We also have a very high-quality servicing book and that's part of why [Indiscernible] ship with ServiceMac was so attractive frankly to both sides. What I would expect going forward is on a per unit basis the cost to remain similar to where it is now, that it will become more variable in nature so in other words, right now, for this quarter, for example, we had circa $16 million of expenses attributable to the servicing segment as the portfolio decreases once we fully transition to service Mac, that'll ratio metrically go down or up on a per unit basis depending on the amount of servicing we’re carrying. [Indiscernible] Go ahead, Willie.

Willie Newman: It won't impact the MSR valuation.

Mark Elbaum: That was -- I was going to follow-up with that very same thing, yes. Fair valuation.

Kevin Barker: Okay. Thank you for taking my questions.

Operator: Our next question comes from the line of Quake Gilbarco with Goldman Sachs, please proceed with your question.

Unidentified Analyst: Hey, guys, thanks for taking my questions. Most of them were answered, but I just wanted to follow-up on the balance sheet really quickly. If you'll give me a second, I know the 10-K hasn't come out yet. And so if you can help me on the on the term debt and other borrowings, it went up about a 116 volume. It was that just the MSR lines or was it something else?

Mark Elbaum: No, that would just in the MSR lines, and that'll -- as the next couple of quarters progress, that'll get paid down quite a bit.

Unidentified Analyst: Also, and just a follow-up on the MSRs, what's the proportion of the MSRs that originated this quarter were held versus sold?

Mark Elbaum: So all of the MSRs that were created this quarter are held. But most of the MSR that was sold would've been, let's call it, portfolio MSR.

Unidentified Analysts: Understood. I appreciate you guys taking up my questions. Thank you so much. And best of luck.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Ginger Wilcox for closing remarks

Ginger Wilcox: Thank you, Operator and thanks everyone for joining us this morning for our quarterly earnings call. Please feel free to contact me if you have any questions and we look forward to speaking with you again next quarter.

Operator: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.