COOP earnings call for the period ending September 30, 2024.
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Mr. Cooper Group (COOP -4.05%)
Q3 2024 Earnings Call
Oct 23, 2024, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and thank you for standing by. Welcome to the Mr. Cooper Group Q3 2024 earnings conference call. [Operator instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your first speaker at Mr. Cooper Group. Please go ahead.
Kenneth A. Posner — Senior Vice President, Strategic Planning and Investor Relations
Good morning, and welcome to Mr. Cooper Group’s third quarter earnings call. My name is Ken Posner, and I’m SVP of strategic planning and investor relations. With me today are Jay Bray, chairman and CEO; Mike Weinbach, president; and Kurt Johnson, executive vice president and CFO.
As a reminder, this call is being recorded. You can find the slides on our investor relations web page at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we’ve identified in our 10-K and other SEC filings.
We are not undertaking any commitment to update these statements if conditions change. I’ll now turn the call over to Jay.
Jay Bray — Chairman and Chief Executive Officer
Good morning, everyone, and thank you for joining our call. Let’s dive into the quarterly highlights, starting on Slide 3. In summary, we produced a very solid quarter with pre-tax operating income of $246 million and operating ROTCE of 16.8%, which is at the upper end of our guidance. Tangible book value grew 11% year over year to $69.93 per share, and our balance sheet remains in strong shape with a capital ratio of 27.9% and liquidity at a record high of $4.1 billion.
Turning to operations. We grew the servicing portfolio to $1.2 trillion, which represents 5.4 million customers and generated $305 million in pre-tax servicing income, thanks to continued strong operating leverage. Our originations segment generated $69 million of pre-tax income, which significantly exceeded our guidance. This was, of course, due in part to the drop in mortgage rates in the quarter.
However, we also benefited from investments we’ve been making in both our direct-to-consumer and correspondent platforms, which together out-indexed the market with 80% sequential growth in fundings. I’m also very pleased to report that Mr. Cooper was certified once again as a Great Place to Work, which now makes six consecutive years that we’ve received this special recognition. We put a lot of care into creating a purposeful and welcoming environment for our team members, and I’m delighted with this independent validation of our culture and our people.
Finally, I’ll mention that the Flagstar acquisition remains on schedule to close in the fourth quarter. We’ve been spending a lot of time getting to know the very talented team members in Flagstar’s mortgage operations, and we’re excited to welcome them to the Cooper family. If you’ll turn to Slide 4, I’d like to share some thoughts about our competitive position as we look ahead into 2025 and beyond. As you know, we’re very proud of our 20-year track record of portfolio growth, which has culminated in $1.2 trillion in outstandings.
However, a different way to think of scale is that we now have 5.4 million customers, which will rise to over 6 million when Flagstar closes. This makes us the single largest customer franchise in the mortgage industry. Now, our mission is to help every single customer achieve their dream of homeownership, and we are constantly working with them through a variety of channels, answering questions, suggesting opportunities to save money or providing assistance when they face challenges. As of today, we’re running at 152 million customer interactions per year.
As a result, we have amassed an enormous amount of information about how best to serve mortgage customers. In fact, our data lake now contains 16 petabytes. In a world of digital technology and especially AI, this data gives us a real advantage when it comes to understanding customers’ needs and how to create value for them. Our goal is to become increasingly more proactive at anticipating their needs and faster at solving them.
So if you’ll turn to Slide 5, I’ll summarize the investment plans we’ve put in place to implement this vision, which we’re now in the process of finalizing for our 2025 budget. To start with, we’re investing in multiple areas to continue improving the customer experience. One such area is AI in the call center, where earlier this month, we began piloting Agent IQ. This app is a state-of-the-art AI-driven coaching platform, which listens to calls in real time, assesses sentiment and prompts our team members on how best to help the customer.
We’re also continuing to invest in our digital-first platform, which consists of self-serve channels like web, mobile and IVR, where customers can access information at their fingertips. Our second focus area is originations, where we believe we can sustainably gain market share in both our DTC and correspondent channels. We are working on enhancements for customers, including a faster and easier application process. And we are continuing to componentize and automate our workflows with the goal of driving lower unit cost savings and faster cycle times.
Our third focus area is loss mitigation, which may surprise you since delinquencies are so low today. But we know the cycle will eventually turn. We’re working on innovative technologies, which will increase our capacity to help customers in what might be more difficult environments in the future. Finally, to support all these initiatives, we’re constantly strengthening the core.
Last week, we announced the promotion of Sridhar Sharma to chief innovation and digital officer, and the hiring of Jeff Carroll as chief technology officer. Jeff’s mission is to ensure our cloud-native tech stack is ready for the next leg of customer growth. These investments will benefit our customers, clients and investors, and they will drive long-term productivity gains for the company. We can afford to make these investments because the company is generating consistent, strong profitability and cash flow.
In fact, I would say, based on my 25 years of experience here that there is as much excitement in the company and energy among our people as I’ve ever seen. In the last few years, we’ve hit important strategic milestones. We’ve emerged as a scale leader in our industry, and we’re gratified to see market recognition of this in a rising stock price, which recently hit a record high. Yet the stock’s valuation is still quite modest in our view, at only eight times consensus 2025 earnings despite a significant runway for growth and rising return on equity.
We think there’s still a meaningful opportunity for investors to join us on this journey, and we continue to view stock repurchase as a smart way to invest the company’s own capital. And with that, I’ll turn the call over to our president, Mike Weinbach, to take you through our operational results in more detail.
Mike Weinbach — Analyst
Thanks, Jay, and good morning, everyone. I’d like to start by reviewing the servicing segment, where we reported pre-tax income of $305 million, which is up 38% yea -over year, thanks to strong portfolio growth of 32% year over year and positive operating leverage. Let me start by commenting on macro factors, specifically interest rates. As you can see in the chart in the upper right, CPRs rose sequentially from 5.5% to 6.2%, which contributed to somewhat higher amortization in the quarter.
We expect CPRs to continue rising in fourth quarter and throughout 2025. So higher amortization will be a theme for servicing, as well as some pressure on net interest income due to the custodial deposits we manage, which are sensitive to the Fed funds rate. However, we expect the impact of interest rates on servicing to be offset by gains in originations, which is the nature of our balanced business model. And meanwhile, we continue to deliver very strong operating leverage.
So let’s turn to Slide 7 and drill down on this topic. Due to strong portfolio growth, servicing revenues increased by 38% year over year. At the same time, as you can see from the chart on the left, servicing FTEs actually decreased by 8%. This is the result of a large number of process improvements, including our digital-first strategy, which makes more information available to customers in the channels they prefer, which are typically self-serve channels rather than phone calls.
The chart on the right shows you the continued decline we’re seeing in calls per loan, while utilization of other channels, including chat, IVR, mobile and web is rising. Now, phone calls will remain a critical channel for many customers, and we’re committed to making this an excellent experience for them. If you’ll turn to Slide 8, I’ll give you a quick preview of our latest innovation, which Jay referenced, our Pyro Agent IQ, AI-driven coaching platform. This slide shows you the display that comes up on our team members’ screens when they’re taking a call.
If the AI listens in real time, you can see a sentiment indicator toward the top, as well as information about the customer’s question to the right, while on the bottom of the screen are suggested actions. This platform is one example of how we leverage those 16 petabytes of data. As it listens to the conversation, the AI system is reviewing a huge number of call logs to understand the most likely issues on the customer’s mind and how our team members have most efficiently solved these problems for other customers. The system then prompts the agent with suggestions on how to proceed with the conversation or what kind of information the customer may be looking for.
The goal of Agent IQ is to make our people extremely productive by helping them learn from best practices across our call center. Also, by saving them the chore of manually looking up files, the system lets our team members focus empathetically on the customer and their needs. We started piloting Agent IQ earlier this quarter and expect it to roll out in both servicing and originations in 2025. To wrap up on servicing, considering the impact of interest rates, our continued success in driving efficiencies and the closing of the Flagstar acquisition, we’d guide you to a range of $285 million to $305 million in pre-tax servicing income for the fourth quarter.
So now let’s move on to talk about the originations segment, where we significantly outperformed our $35 million to $45 million guidance with pre-tax income hitting $69 million. I’ll start on Slide 9 by double-clicking on DTC, where we funded $2.3 billion, up 35% from second quarter. Clearly, our DTC team did an excellent job with execution this quarter, taking advantage of the rate drop in September to help customers save money and access equity. I’ll also share that they responded very effectively to some market pressure in the quarter through innovative marketing and competitive pricing, which helped us sustain our recapture rate of nearly 70% despite higher volumes.
The strong performance also reflected several initiatives that came together during the quarter. For one, Project Flash is producing efficiency gains and faster cycle times. Additionally, this year, we kicked off another project, which we call Front-office Modernization, which includes improvements to the customer experience, such as new self-serve options, and this is starting to drive higher sales team productivity, as well as higher customer satisfaction scores. Also, contributing to strong results this quarter, we’ve been adding capacity.
So far this year, our amazing talent acquisition team has brought in over 300 new team members, giving us the capacity to move quickly when rates are favorable as we just demonstrated. We’ve also been working to shorten the time it takes to hire, onboard and train new team members. Overall, we’re in a great position to take advantage of lower rates, whether they’re sustained or occur in intermittent rallies as happened in September. As a reminder, our customer base has been gradually shifting with approximately 20% of our customers now having note rates of 6% or higher.
If you’re interested, you can find a chart with the full rate stack for our MSR portfolio in the appendix. Turning to Slide 10. Our correspondent team produced truly extraordinary results, more than doubling volumes from second quarter. And I would add that this was without sacrificing margin.
Now, let me remind you that over the last two years, we stepped back from correspondent to some degree because we correctly anticipated a dislocation in the bulk market, and we allocated most of our capital to that opportunity where option-adjusted spreads for seasoned pools were historically attractive. However, at the same time, we were launching initiatives to level up our correspondent platform since we knew the cycle would eventually turn. Much of our work focused on developing more granular pricing models, allowing us to win the right loans at the right prices. Additionally, we went through an exhaustive review of our client relationships and found ways to deepen penetration.
We made several process improvements to speed up cycle times. We rolled out a new client portal, and we also took specific steps to improve capital markets execution. At the same time, we’ve remained disciplined with respect to credit risk and manufacturing quality, and we have no plans to loosen standards. Looking ahead, we see an opportunity to grow significantly in correspondent.
Given our cost leadership as a scaled servicer and our industry-leading recapture, we should be the best buyer of MSRs, not only in the bulk market, but in all markets. To sum up, third quarter should give you a strong hint as to the potential we have in originations. And as we look ahead to 2025, we expect originations to make a much larger contribution to the company’s overall financial returns. Having said that, as you know, there’s a timing difference between revenue and expense recognition and the funding costs associated with strong rate locks in the third quarter will be recognized in the fourth quarter.
Additionally, mortgage rates have backed up since September, reducing some of the opportunity to help customers with rate and term refinances. As such, we’d guide you for now to a more normalized level of profitability in fourth quarter with pre-tax originations income in a range of $45 million to $65 million. With that, I’ll hand it over to Kurt.
Kurt Johnson — Executive Vice President, Chief Financial Officer
Thanks, Mike, and good morning, everyone. I’ll start on Slide 11 with a brief recap of our financials. To summarize, net income was $80 million, which included $246 million in pre-tax operating earnings, offset by $126 million negative MSR mark net of hedges and adjustments of $6 million, which consisted of $4 million in transaction costs related to the final onboarding of customers from the Home Point acquisition and a $2 million loss associated with equity investments. I would point out that corporate debt interest expense increased from $67 million to $75 million sequentially, reflecting two months of interest expense from the senior notes issued in August.
Starting in the fourth quarter, you should model $79 million in quarterly corporate debt interest expense to account for the full impact of the new issuance. During the quarter, we marked down the MSR by $415 million due to lower interest rates and expectations for higher CPRs, leading to a quarter end valuation of 148 basis points of UPB or a 5.1 multiple of the base servicing strip. This was offset by $289 million in hedge gains, which equates to 70% coverage, which was within range of our 75% target ratio. Now, if you’ll turn to Slide 12, I’ll comment on credit quality, which has been in focus recently for certain consumer lenders.
But you’ll see our high-quality mortgage portfolio is performing very consistently with MSR delinquencies up slightly by about 8 basis points to 1.1%, that’s extremely strong performance. This slight increase is being driven by FHA and VA collateral, which is something we’ve been expecting and planning for, and which is why we’ve limited FHA and VA to only 18% of our MSR portfolio. Also, we’ve chosen very high-quality collateral where customers have low note rates and large equity cushions. And the result of our selectiveness is evident in the chart on the lower left, where you can see our Ginnie portfolio is outperforming the industry by a considerable margin.
While we don’t try to forecast overall consumer credit cycles, we have deep experience managing delinquent books. And if the environment were to turn more adverse, we believe Mr. Cooper and our investors would be extremely well protected. Lastly, turning to Slide 13, I’ll update you on our key balance sheet metrics.
We ended the fourth quarter with record liquidity of $4.1 billion, up from $3.2 billion in the second quarter, driven by the issuance of $750 million in senior notes, as well as $750 million of incremental MSR financing capacity. You’ll notice that our unrestricted cash balance has been gradually rising, consistent with our internal policy, which sets our liquidity target at a sizable multiple to all regulatory requirements. Other positive liquidity metrics include the fact that nearly all our MSR and advance lines are now termed out to 2026 and two thirds of them are fully committed. Our capital ratio, as measured by tangible net worth to assets ended the quarter at 27.9%, down about 50 basis points from last quarter, but still above our target range of 20% to 25%.
The gradual pace at which we’ve deployed our excess capital over the last year speaks to our discipline as stewards of investor capital as we seek the highest returns available to us in the bulk and correspondent channels while continuing to repurchase shares as well. Now, let me remind you that the reason we set a range for our target capital ratio is that the mix of assets on our balance sheet shifts depending on the environment. If we grow our originations business in 2025, as we expect, you will see a higher mix of loans held for sale on the balance sheet. And accordingly, our capital ratio might well move into the middle of our range or even toward the low end.
This is because we set higher capital levels for MSRs than we do for loans. Regardless of the ratio, unsecured note holders, rating agencies and other stakeholders will continue to benefit from a solid balance sheet, robust cash flows, a disciplined enterprise risk management framework and our industry leadership position. I’ll wrap up now by commenting on the outlook. Clearly, this was an exceptional quarter with 16.8% ROTCE.
As Mike pointed out, in the fourth quarter, we do expect a slightly lower level of earnings in both servicing and originations, but we continue to anticipate 2025 ROTCE at the midpoint of our 14% to 18% guidance range based on the growing contribution from originations, further operating leverage in servicing and the accretion from the Flagstar Mortgage Banking acquisition. With that, I’d like to thank you for joining us on today’s call and for your interest in Mr. Cooper. I’d now like to turn the call back over to Ken for Q&A.
Kenneth A. Posner — Senior Vice President, Strategic Planning and Investor Relations
Thanks, Kurt. And D.D., if you could now start the Q&A session, please.
Questions & Answers:
Operator
Thank you. [Operator instructions] And our first question comes from Terry Ma of Barclays. Your line is open.
Terry Ma — Barclays — Analyst
Hi. Thank you. Good morning. I think you mentioned the $45 million to $65 million pre-tax guide for originations in the fourth quarter was kind of the new normalized run rate? And if that’s right, can you maybe just talk about the drivers there?
Mike Weinbach — Analyst
Yes. Thanks, Terry. It’s Mike. So that’s right, $45 million to $65 million guide.
And this has been a challenging quarter to guide for because as recently as the middle of September, we had mortgage rates below 6%, and now they’re running over 6.5%. And so, as we look ahead, we still see a lot of momentum in our Direct-to-Consumer business driven by some of the enhancements that we’ve made. We still see a lot of opportunity if rates are higher and there’s less opportunity for rate term refinances for cash out and home equity. And just to share with you, over 80% of our customers have more than $50,000 of tappable equity in their homes and more than 60% have $100,000-plus.
So we see a lot of opportunity regardless of environment and the guide for this quarter is heavily dependent on what happens with rates, but we feel good about the progress we’re making in the business regardless.
Jay Bray — Chairman and Chief Executive Officer
And if you think about it, and we’ve talked about it a lot, I mean, the impact of our balanced business model will certainly kick in, right? If we do see rates stay at this level, obviously, servicing will benefit significantly. And so, that’s how we think about it. I mean, it’s purely a function of what our prepay is going to look like, what’s the opportunity set and which is why we’re guiding to that level. But servicing, again, given the balanced business model, would certainly benefit if rates stay at this level.
Terry Ma — Barclays — Analyst
Got it. That’s helpful. And I guess, is there any color you can provide on what you saw in the quarter within the DTC channel versus maybe expectations? I would have thought in terms of the volume increases in the third quarter, DTC might have come in a bit stronger and correspondent a little less strong. Any color you can provide there?
Mike Weinbach — Analyst
Yes, sure. I’ll start, and then Jay and Kurt can add on. And it was an interesting quarter. It was almost like two halves, beginning in the middle of August when rates started to drop, we saw a significant shift toward rate term refinances.
And to put that in context, what we were seeing in terms of locks was probably 70% to 80% higher than what we were seeing in the period before that, again, with rate term refinance. Purchase held steady, grew slightly. Home equity stayed relatively consistent through it. Cash out refinance stayed relatively consistent to slightly up.
Within the Correspondent business, it was — it probably had less to do with rate and more to do with some of the changes we’ve been making across the business. We feel really good about the growth opportunities we have in the Correspondent business as the most efficient and best servicer and being one of the top players in the industry in terms of recapture. We don’t see any reason why we shouldn’t be a much more significant player in the Correspondent business. We’ve made changes to our pricing models.
We’ve doubled down on our client relationships. We’ve made changes to our capital markets execution. And I think you saw that in the quarter, and I think you should expect to see that continue.
Jay Bray — Chairman and Chief Executive Officer
Yes. I mean, I think a simple way to think about it is when you look at recapture, we’re close to 70%, right, and which is awesome. And so, I think the Direct-to-Consumer team did a great job, came in kind of in line with where we would expect. And again, as I said earlier, if rates go in a different direction and move down, they’ll kill it.
And so, recapture is core to who we are. We’ve been doing it for decades, and we would expect great things from that channel. And to Mike’s point on correspondent, look, at the end of the day, we are, we think, the lowest cost servicer. We think, as I mentioned, we have the best recapture, and so we should be the best buyer of MSRs.
So there is massive opportunity in the correspondent channel, and we will take advantage of that. And I don’t know, Kurt, did you want to add anything or?
Kurt Johnson — Executive Vice President, Chief Financial Officer
I mean, I would just add on Mike’s comment for correspondent, and it’s true for DTC as well in terms of execution on the capital market side. Jay mentioned our excellent recapture and we do, but we look also at speeds and investors, and we look holistically at execution, and we need to be cognizant of the speeds that we’re generating, particularly around Ginnie Mae securities to maximize our ongoing opportunities there.
Jay Bray — Chairman and Chief Executive Officer
That’s a great point.
Terry Ma — Barclays — Analyst
Got it. That’s helpful. Thank you.
Operator
Thank you. And our next question comes from Mark DeVries of Deutsche Bank. Your line is open.
Mark Devries — Analyst
Thanks. I was hoping you could discuss kind of the latest state of the pipeline for bulk servicing acquisitions. There’s still anything out there that could really move the needle for you guys? And also just discuss flexibility you have to do more deals kind of post Flagstar. It looks like you added significant capacity in unused lines during the quarter.
So liquidity really shouldn’t — or should remain strong after the deal and your tangible net worth to assets should still be kind of at the high end of your target range. So just could you just discuss opportunity and flexibility in that market?
Jay Bray — Chairman and Chief Executive Officer
Yes. It’s a great question, Mark. I think, look, we announced Flagstar. We feel like we’re in a great place.
That will close in the fourth quarter. which is obviously a significant bulk acquisition. When you look at the landscape now, I mean, a couple of years ago, we anticipated a disruption. We acted on that, and we’ve grown our portfolio almost 75%.
So I think the track record kind of speaks for itself. As you think about the landscape today, clearly, as we pointed to on the last call, it has slowed down. I think some of that’s just seasonality. We have acquired a couple of small pools, kind of slightly less than $10 billion recently.
So there’s still activity. We’re going to participate in that activity, and we would expect it to pick up in the first half of next year. And the bulk market is always going to be there, right? And we are the best buyer of bulk. And so, I think we’ll be opportunistic.
And when the returns make sense, we’ll play there appropriately. From a capacity standpoint, you hit the nail on the head. I mean, we have plenty of capacity. We’ve been very intentional about increasing our lines, very intentional about having dry powder to act when appropriate.
And so, we feel great about that. And when you look at our tangible net worth to asset ratio, plenty of room there. That will come down slightly, I think, in the fourth quarter because of Flagstar, but still plenty of room to move and plenty of room to act. The other thing I would say is when you think about subservicing, we think we’re — there’s going to be some wins there as well.
And so, we continue to be excited about that channel. We’ve partnered with strong financial buyers and strong originators. So that flow will continue. But we expect new clients there, too.
So a lot of good things to come, I think, on both fronts.
Mark Devries — Analyst
OK. Great. And when I think about kind of your past approach to the correspondent, I describe it as being a little bit more opportunistic. But am I right in kind of interpreting your comments today, is it seeming like you now feel like you have a real reason to win and maybe a more committed kind of participant in that channel and look to take share in the longer term?
Jay Bray — Chairman and Chief Executive Officer
100%. Like I really believe — I mean, look, we’re always going to be very, very good stewards of deploying capital. And so, we’re going to look at what are the best opportunities in the marketplace. But as we look at our position, again, from a cost of service standpoint, from a retention standpoint, we should be and I think are the best buyer of MSRs in any channel.
and correspondent presents — we’ve been in it for years, and we think we can definitely take more share there. We will take more share there, and we think there’s opportunities to grow it in a significant way.
Mark Devries — Analyst
Great. Thank you.
Operator
Thank you. One moment for our next question. And that will come from the line of Eric Hagen with BTIG. Your line is now open.
Eric Hagen — Analyst
Hey. Thanks. Good morning. When we compare the adjusted EBITDA and the sources and uses of cash flow on the last two slides of the deck, what are the key differences maybe between those figures? And which do you feel like is a better reflection of the cash flow that you guys manage the business to?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Eric, it’s Kurt. I mean, I think that the answer is the sources and uses of cash flow are how we manage our acquisition strategy and share repurchase on a go-forward basis. So the last chart really shows kind of what we’re looking at from a true free cash flow perspective after you talk about kind of the recapture and what’s available for whether it be correspondent or other acquisitions, bulk acquisitions or share repurchases.
Eric Hagen — Analyst
OK. Gotcha. That’s helpful. One more on cash here.
I mean, it looks like the cash flow amortization was $234 million in the quarter. Do you have an estimate for what that number is following the onboarding of Flagstar? Would you say it’s like proportional? And is there a good way to benchmark that figure going forward for changes in mortgage rates?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Yes. I mean, we don’t give guidance for that, Eric. But yes, I mean, I think proportionately, right, the Flagstar acquisition will probably add, call it, between $50 billion and $70 billion of MSRs against our existing $600-plus billion and the stratification of the portfolio is about the same as our existing MSR portfolio. So kind of a pro rata amount of things.
Eric Hagen — Analyst
OK. Great. Thank you, guys, very much.
Kurt Johnson — Executive Vice President, Chief Financial Officer
Thanks, Eric.
Operator
Thank you. One moment for our next question. And that will come from the line of Giuliano Bologna with Compass Point. Your line is open.
Giuliano Bologna — Analyst
Hi. Good morning. Congratulations on the continued strong performance. As a first question, I’m curious about is you’ve had some pretty incredible operating leverage on the servicing side, salaries, wages, benefits and some of the other lines are effectively flat year over year, while UPB is up 30%.
Going forward, I’m curious how much more operating leverage you think you have and how much slower your operating expense base should probably grow versus your UPB going forward?
Mike Weinbach — Analyst
Yes. Thanks, Giuliano. The short answer is we think we have a lot of continued opportunity. So this isn’t a onetime event.
It’s a result of a continuous strategy of investing and perfecting the platform. And we believe we’ve really built a scalable servicing platform. And the things that we showed you like Agent IQ and some of the other investments we’re making, we think are going to allow us to continue to be more efficient, and we expect to continue to grow, but to be able to continue to manage expenses as we do it. And so, we really see the scale benefits is as we’re getting larger, our cost per loan to service has been coming down, and we expect that trend to continue.
Jay Bray — Chairman and Chief Executive Officer
And if you think about it, I mean, all the investments that we talked about are — we’re maniacally focused on the customer experience and certainly focused on driving that cost per loan down. I think Mike had said this on the previous call, but if you reduce your handle time by 10 seconds, that’s over $1.3 million in savings. If you reduce your calls by 10% because you’re delivering such a great digital experience to the customer, that’s over $10 million in savings. And so, I think we’re in the early innings of this.
And Jay Jones, who runs servicing, his team are excellent at identifying opportunities. And so, I think, Giuliano, it’s — we’ve got a long ways to go, and we’ll continue to drive cost per loan down with a great customer experience.
Mike Weinbach — Analyst
And just to connect the final dot on what Jay said. So what we’re showing with the way we’re deploying AI technology in servicing, and frankly, we plan to do the same thing in our originations business. But for the servicing example, when our customer service team is taking a call, you can see how the AI is now pulling information forward that they’d otherwise have to go look for. And if an average call is 10 minutes, we think there’s probably two to three minutes that are spent looking for information to be able to help deliver a great experience to the customer.
We think we’re going to be able to deliver a better experience by having it faster, but just connect the dots to what Jay said in terms of what 10 seconds of time saved on a call is in terms of dollars. And if you can save two to three minutes, it really starts to make an impact.
Giuliano Bologna — Analyst
That’s very helpful. I appreciate that. And then, thinking about on the origination side, maybe a bit more focused on DTC. But from a processing perspective, most loan officers can kind of process the same amount of seconds lien versus cash out refis in a given period.
I’m curious how impactful it is to switch volume from second liens that might have a higher gain on sale ratio, but switching that volume to more cash out refi or rate term refi where the dollar balance is probably four times the size and how much incremental value that can help you pick up or earnings power that can help you pick up over the next few quarters?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Yes. I mean, I think you hit the nail on the head, right? Our rate term refi margins are a little bit lower than our cash out refi margins. And certainly, our second lien margins are pretty tremendous. And I think Mike can speak to it, but the team does a really tremendous job from a marketing perspective.
Obviously, any customer that calls us, we’re going to do their loan, right? But from a marketing perspective, being able to pivot on a dime based on where rates are to really drive kind of the volumes that we want to see between those three different products depending on where the rates are. And Mike talked about the number of customers who are — who have $50,000, $100,000-plus of tappable equity. Rates have backed up 60 basis points since the end of the quarter. And with that, our strategy has pivoted and our rate lock’s volume remains really, really strong.
Mike Weinbach — Analyst
Yes. And I’ll just add, if you think about — when we talk to a customer, we’re just trying to help them find the best product to meet their needs. Sometimes that’s a rate term refinance, sometimes it’s a cash out refi, sometimes it’s a second. And so, we’re going to do whatever is best for the customer, and that will change depending on the interest rate environment.
The thing that I think is exciting about our Direct-to-Consumer business is during this very difficult last couple of years for the industry where it was very difficult to be profitable in the business, we were still profitable. We continually have been investing in the platform. And those — that combined with more and more of the originations being done at higher rates, and we’ve shown 20% of our customers are at 6% plus, it has created a bit of a coiling spring in the DTC business. And what we saw for a brief period in the third quarter when rates came down is that we’re able to react very quickly, and it had a very meaningful impact on our profitability.
And rates are back up a little bit right now. And so, we might see more cash out in seconds than rate term. And so, we’re guiding a little bit lower for this quarter, but still higher than what we were earning at the last time we were at those levels. We have more portfolio growth that’s coming, particularly when we close the Flagstar acquisition.
And we’ve been steadily building capacity throughout the year in anticipation of this. So I think what the third quarter showed is we can move really quickly and it’s very profitable when we do so. And as we look to next year, we’re not making predictions on rates, I think, other than that they’ll fluctuate. And we’ll be prepared regardless of what happens with rates to make sure we’re doing the right things for our customers and our balanced business model make sure that we’re delivering good returns for our shareholders.
Giuliano Bologna — Analyst
That’s very helpful. And then, hopefully, a much quicker and simpler question because I thought to call up a little bit on my side. When you talk about the guidance numbers for servicing and originations, those include any impact from Flagstar? And then, as a little bit of a follow-up, I’m curious if there are any — if you have the expectation of closing later or sooner in the fourth quarter for the Flagstar transaction?
Kurt Johnson — Executive Vice President, Chief Financial Officer
So Giuliano, great question. Yes, thanks. The guidance does include the impact of Flagstar, and we do anticipate that it will close earlier in the fourth quarter than later. But obviously, we’re just guiding to fourth quarter close.
Giuliano Bologna — Analyst
That’s very helpful. I appreciate it and I will jump back in the queue.
Operator
Thank you. One moment for our next question. And that will come from the line of Bose George with KBW. Your line is open.
Bose George — Analyst
Hey, guys. Good morning. Just wanted to go back to the correspondent versus bulk discussion. I mean, in terms of your market share in correspondent, is it fair to say it’s likely to remain at the levels you did this quarter or even potentially improve as the bulk opportunity has largely played out, I guess, is that what you’re suggesting?
Jay Bray — Chairman and Chief Executive Officer
No, I don’t think the bulk opportunity has played out, Bose. I think you’ve been doing this a long time, and we have to. So we — I think there’ll be plenty of opportunities to participate in the bulk market going forward. But that will ebb and flow as we’ve seen over the past.
I think on the correspondent, I think we will be able to grow that beyond what you saw in this past quarter, and that would be our intention. I mean, again, when you look at it, I would say, No. 1, the capital deployment, we’re always going to be very disciplined. So we’ll look at where the best opportunity is.
But we believe the correspondent franchise that we built is very strong. We like the returns in that channel, and we expect to grow it beyond what you saw in this previous quarter. And so, we are very bullish on the opportunity there. So we think that we will grow it significantly beyond where it was in this past quarter.
Bose George — Analyst
OK. Great. And then, actually, just a little question on the corporate expense line item. I couldn’t recall, was there some onetime last quarter? And is the $72 million this quarter more of a normalized run rate?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Bose, it’s Kurt. So I think it’s $53 million, not $72 million versus $39 million last quarter. And yes, you’re correct. Some onetime — there was a little bit of onetime benefit last quarter, call it, to the tune of $2 million or $3 million.
But we do anticipate that in Q4, it will go down back to sort of the $40 million level and run rate that it had been before. There were a few onetime costs that came through this quarter as well.
Bose George — Analyst
OK. Perfect. Thank you.
Operator
One moment for our next question. And that will come from the line of Eric Hagen with BTIG.
Eric Hagen — Analyst
Hey, thanks for taking my follow up. I actually want to ask about the Ginnie Mae capital rules, how you see the market responding when those take effect. I mean, I imagine you guys are well capitalized relative to the standards, but do you think the implementation of those rules could catalyze bulk servicing trades or MSR valuations to be disrupted or no anyway?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Eric, it’s Kurt. It’s a good question. Yes, I mean, the Ginnie Mae risk-based capital rules came out almost two years ago now. And yes, we’ve been following and monitoring closely.
We’re extremely well capitalized based on kind of all the guidance and we stay sort of closely in tune with Ginnie in terms of any kind of changes that they plan on making to those guidelines. Will it be a catalyst for more MSR sales? Look, potentially, I mean, I think that Ginnie themselves said that there were two or three based on their calculations that were undercapitalized two to three servicers. I think we’ve seen one public that had indicated that they were as well. So yes, maybe it will drive some Ginnie Mae bulk sales.
And we actually have seen Ginnie Mae activity, which has been really, really modest actually in terms of bulk sales. We’ve seen a little bit more activity in the Ginnie space as the year has progressed.
Eric Hagen — Analyst
Great. Thank you, guys.
Operator
Thank you. One moment for our next question. And that will come from the line of Crispin Love with Piper Sandler. Your line is open.
Crispin Love — Piper Sandler — Analyst
Thanks. Good morning, everyone. Just with your 14% to 18% ROTCE target for 2025, can you just speak to some of your assumptions? What could get you to the higher end of that range? In the prepared remarks, you mentioned the origination segment making a bigger impact in 2025. Servicing has been in that 80% plus range of pre-tax and is expected to be in the fourth quarter as well.
So just curious what kind of level would you expect that to be in 2025 to get to the higher end of that range or even above that as originations make a bigger impact?
Kurt Johnson — Executive Vice President, Chief Financial Officer
Yes. Good question. I think that the answer is we’ve said we’re very comfortable in the middle of the range already. And so, I think going up into the higher end of that range, there are a lot of things that could catalyze that.
I think originations and kind of periodic episodes like we had in August and September, where originations volumes go up because there are borrowers that are in the money, I think, could help drive that. I think that more — sorry, more subservicing volumes, which Jay talked about earlier, we’ve got a healthy pipeline of subservicing. And keep in mind, subservicing does not deploy any capital for us. So it’s true fee-based income.
I think that could catalyze and drive earnings up into the higher end of the range. And then, candidly, if rates stay high and speeds come down and the Fed is not as aggressive as maybe a lot of people think they’re going to be and we don’t have the six rate cuts, that could drive us into the higher end of the range. So we think that there are a lot of opportunities to drive us into the higher end of the range and really not much that would drive us down into the lower end of the range.
Mike Weinbach — Analyst
And I’ll just add — sorry, Crispin, I agree with everything Kurt said. And just remind everybody, we came into the year introducing this 14% to 18% range. Through this year, we’ll probably operate at the 15% level. And we’ve seen momentum.
We have like a little bit of the wind at the back of our balanced business model with everything that we’ve done this year. And so, this quarter ended up a little bit higher because the size of the originations market and the fact that we recognize revenue at the point of lock. But again, like I think if you take a step back, we feel comfortable that regardless of where the rate environment is, our balanced business model is going to allow us to operate in the middle point of that range. And given where we trade as a multiple of book and a multiple of earnings, generating mid-teens ROE off of the balance sheet parts of our business.
As Kurt mentioned, we have a number of capital-light fee-based revenue streams from subservicing, special servicing and some of our other businesses and the opportunity that’s there on the origination business, we’re excited as we look ahead to next year.
Crispin Love — Piper Sandler — Analyst
Great. I appreciate all that color. It definitely makes sense. And then, just digging a little bit deeper on recapture.
Can you discuss your positioning in this cycle compared to prior cycles? You mentioned technology, AI and other areas. And do you expect these areas to drive higher or maintain your current recapture rates? Are you seeing that already? Just a little more color on what you’re doing on the tech side for recapture would be great?
Jay Bray — Chairman and Chief Executive Officer
Yes. I think, look, we’re 100% think that we’re going to do better. I mean, when you look at the investments we’ve made from a process standpoint, it’s delivering a better customer experience. We’re confident in our cycle times.
We are carrying additional capacity now kind of as we speak and continue — and plan to continue to do that. I think that’s going to contribute to consistent, if not higher recapture. Then candidly, when you look at our analytical capability, the marketing capability, the models that we’ve built around propensity, I mean, all those have just gotten better over time. We’ve got a super talented team there.
And so, when we look — I mean, we’re looking at this at a customer level and scoring at a customer level. And so, we feel very good and very confident that we’ll be able to maintain and grow recapture in really any cycle. And it’s going to be dependent on what the customer ultimately — what’s the best thing for the customer, but the investments we’ve made are definitely going to drive better results.
Crispin Love — Piper Sandler — Analyst
Thank you. I appreciate you taking my questions.
Operator
Thank you. I’m showing no further questions in the queue at this time. I would now like to turn the call over to Mr. Jay Bray for any closing remarks.
Jay Bray — Chairman and Chief Executive Officer
We really appreciate everybody joining us and look forward to further conversations. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Kenneth A. Posner — Senior Vice President, Strategic Planning and Investor Relations
Jay Bray — Chairman and Chief Executive Officer
Mike Weinbach — Analyst
Kurt Johnson — Executive Vice President, Chief Financial Officer
Ken Posner — Senior Vice President, Strategic Planning and Investor Relations
Terry Ma — Barclays — Analyst
Mark Devries — Analyst
Mark DeVries — Analyst
Eric Hagen — Analyst
Giuliano Bologna — Analyst
Bose George — Analyst
Crispin Love — Piper Sandler — Analyst
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