Home Point Capital Inc. (NASDAQ:HMPT) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Greetings and welcome to the Home Point Capital Fourth Quarter 2022 Financial Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lesley Alli. Please go ahead.
Lesley Alli: Thank you, operator. Welcome to Home Point's fourth quarter 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 31, 2021, for factors which could cause actual results to differ materially from these statements.
We maybe 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.
Willie Newman: Thanks, Leslie, and 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 fourth quarter and full year 2022, as well as some initial insight into the first 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 our mortgage originations. As such, the first quarter 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 second quarter of 2023 versus the first quarter, 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 to our focus on margin over volume, we've rebalanced our operating cashflow to best leverage the historically strong performance in our servicing portfolio. In the second quarter of 2023, we expect to be operationally cashflow positive, which is a massive shift from our position in 2021 and 2022. This change in our cashflow 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.
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To give you an idea of the historical scope, prepayments are running at 3%, which is half of the historic floor level of 6%. Our servicing book is a critical input towards a 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 other 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 origination's 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. So, what's the bottom line? We expect to be operationally cashflow positive starting in the second quarter 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.
Mark Elbaum: 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 fourth quarter and year ended December 31, 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 cashflow and earnings profile. As Willie mentioned, liquidity was our top priority in 2022.
In the fourth quarter, 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 fourth quarter of 2022, we further reduce quarterly expenses by 31% quarter-over-quarter, excluding the $13.4 million restructuring, and $10.8 million of goodwill impairment charges in the third quarter.
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 fourth quarter of 2022, reducing our year-end headcount countdown to approximately 830. Additional actions in the first quarter 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 cashflow and earnings profile, our servicing segment earnings trended positively in the fourth quarter 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 fourth quarter 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 fourth quarter of 2022, compared to 51 basis points in the previous quarter, and 58 basis points in the fourth quarter 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, so 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 cashflow 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.
