ONITY GROUP INC. Q1 FY2025 earnings call

• Delivering on 2025 operating priority to accelerate growth in originations volume and total servicing UPB.
• Strong Q1 2025 financial performance: adjusted pre-tax income $25M, annualized adjusted ROE 22% (exceeding guidance), average servicing UPB $305B (+$13B y-o-y).
• Balanced business positioned to perform well in high/low interest rate environments, with servicing platform delivering top-tier performance.
• Servicing portfolio mix and special servicing skills aim to minimize advancing and delinquencies in recession, creating growth opportunities.
• Originations and capital markets teams achieved over 2x growth in total MSR editions y-o-y, with 53% increase in origination volume vs 8% industry growth.
• Progress in recapture platform, with consumer direct funding and lock volume up vs Q1 2024.

Servicing Segment: Adjusted pre-tax income for servicing was a strong contributor. Forward servicing grew adjusted pre-tax income through increased fee generation, up 6% y-o-y and 5% q-o-q, driven by growth in owned servicing (+9% q-o-q) and lower MSR runoff offsetting seasonally lower flow income. Reverse servicing was up q-o-q but down y-o-y, primarily due to strong asset gains in Q1 2024 and valuation adjustments on buyout loans in Q1 2025. Sub-servicing UPB was roughly flat vs Q1 2024, with additions offsetting runoff. Origination Segment: Originations grew adjusted pre-tax income significantly y-o-y, driven by total volume up 50% from Q1 2024 and high margin consumer direct channel up ~165%.

• Maintain full year guidance: adjusted ROE range 16%-18%, servicing book growth over 10% y-o-y, hedge ratio 90%-110%, stable efficiency ratio.
• Potential release of valuation allowance on US Deferred Tax Assets (DTA) by year-end 2025, which could increase book value by approximately $22 per share as it flows through net income and raises book value.

• Interest rate and GSC price volatility impacting hedge costs and origination margin volatility.
• Potential recession impact on mortgage delinquencies, though company's portfolio mix and special servicing skills aim to mitigate exposure.
• Litigation/regulatory matters, including legacy class action litigation and consumer fee-related inquiries.

Q: Randy Binner asked about the valuation allowance news and timing limitations.

A: Sean O'Neil responded that valuation allowance depends on future performance and analysis of cumulative income/loss, with recent strong performance suggesting potential to lift all or some of the allowance.

Q: Bose George inquired about valuation allowance timing and litigation.

A: Sean O'Neil clarified no ownership tests limiting timing, and Glen Messina discussed resolving a legacy class action litigation and current regulatory matters related to consumer fees.

Q: Eric Hagen asked about the Rocket Cooper merger impact on subservicing market and operating efficiency.

A: Glen Messina noted the merger shakes up the market, creating opportunities for sub-servicing clients to explore options, and Sean O'Neil stated operating efficiency objective is to increase pre-tax income in segments without a stated target for a specific period.