ONITY GROUP INC. Q4 FY2024 earnings call

• Debt restructuring: Reduced corporate debt level, average effective cost, extended maturity, and simplified structure. Also monetized MAV investment and acquired reverse assets.
• Investments: In talent and advanced technologies to enhance performance, productivity, and capabilities. Recapture improvement actions led to strong refinance recapture performance. Servicing platform has over $300B portfolio, recognized for industry-leading performance.
• AI: Developed over 30 bots, used optical character recognition, natural language processing, and generative AI for subservicing client support.
• Operating priorities 2025: Accelerate organic growth (target 50-50 mix of owned servicing and subservicing), differentiate operating performance, elevate customer experience, utilizing technology as a key enabler.

For the full year, Onity delivered adjusted pretax income of $90 million, with servicing being a strong contributor. The fourth quarter adjusted pretax income was $11 million, representing the ninth consecutive profitable quarter. Originations saw total servicing additions of $25 billion in the fourth quarter, a 70% increase over 2023. Servicing contributed significantly to earnings, with originations earnings improving versus prior year. In terms of revenue contribution, servicing remained the predominant earnings driver, while originations grew volume. Absolute terms: Full year adjusted pretax income $90M, fourth quarter $11M; originations had $25B in fourth quarter servicing additions.

• Increased adjusted ROE guidance for 2025, targeting 16% to 18% adjusted ROE.
• Expect continued growth in servicing book in subservicing and MSR volume, targeting over 10% year-over-year growth.
• Maintain 90% to 110% hedge coverage ratio.
• Maintain consistent efficiency ratio as revenue increases commensurate with new costs.

• Interest rate uncertainties could impact refinance volume and recapture performance.
• If not investing adequately in recapture platform, may not achieve industry best practice performance.
• Potential challenges in executing on new product offerings like home equity and proprietary reverse mortgages, affecting market penetration.

Q: Bose George asked about the restructuring benefit and gain on sale margin.

A: Sean O’Neil responded on the $14 million benefit for 2025 and that the gain on sale may be driven by direct purchase of MSRs not reflecting loan gain on sale.

Q: Eric Hagen inquired about tech expenses and subservicing operating leverage.

A: Glen Messina discussed disciplined technology investment with business case and payback, and that subservicing has scalable platform with incremental contribution margin of about two basis points.

Q: Randy Binner asked about home equity and proprietary reverse products.

A: Glen Messina explained home equity allows tapping equity while preserving low first mortgage rate, and proprietary reverse is like jumbo mortgage for reverse, expanding addressable market.

Q: Derek Sommers asked about subservicing pipeline and owned MSR range.

A: Glen Messina and Sean O’Neil discussed focus on 50-50 mix of owned and subservicing, and growth in owned MSR book tied to balance sheet positioning and capital light growth strategy