Rithm Capital Corp. (RITM) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Candice and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mandy Cheuk, you may begin your conference.

Thank you, Candice and good morning everyone. I’d like to welcome you today to New Residential's third quarter 2015 earnings call. Joining me here today are Michael Nierenberg, our CEO; Nick Santoro, our CFO and Jonathan Brown, our CAO. Throughout the call, we’re going to reference earnings supplement that was posted to the New Residential Web site this morning. If you have not already done so, I’d suggest that you download it now. Before I turn the call over to Michael, I’d like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and investor presentation regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. And now I’d like to turn the call over to Michael.

Thanks for joining our third quarter earnings call. For the quarter, we had a very busy quarter and our underlying business continues to produce terrific results. While both the equity and debt markets were extremely volatile in the quarter our investments continue to perform well despite the volatility that we've seen. Our business should do well in all interest environments and we have a couple of slides in our presentation that should be helpful in how to think about that. In the quarter, we were very active in our Servicer Advance business. We generated liquidity of approximately $300 million by paying off HSART notes and doing some new financings. On our Call business, we continue to work on strategies to accelerate timelines to be able to call deals in a quicker fashion. We’re working with our Servicer partners as well as outside counsel to be able to do that. Our Non-Agency portfolio grew by 25% during the quarter, and as far as earnings we announced record core earnings, record dividends and we’ll continue to do all we can to create value for our shareholders. We believe our current investment portfolio will continue to deliver excellent results as we look forward. I’ll now refer to our supplement which has been posted online, so we’ll begin on Page 2. I thought it would be helpful to start with a quick recap of who we are. We are an asset manager who deploys capital in three core strategies across the mortgage universe, which is a $10 trillion market. We are not an operating business. Since our spin in 2013 we've generated a 20% total return life-to-date. Our dividends, we paid 593 million of dividends. Today our current dividend yield is 15% and while that's a lot higher quite frankly than where we'd like to be trading, we think there is lots of room for upside and keep in mind in a more normalized markets we've seen companies such as HLSS trade at a dividend yield of 7%. For the quarter, we had record core earnings of $113 million or $0.49 per diluted share. Our GAAP income was $55 million or $0.24 per diluted share. In the quarter, we increased our dividend to $0.46 or a $106 million and on a year-over-year that's up 31%. So overall, I think our results have been terrific. We had a good quarter, if you look back to Q4 of 2013 we've grown core earnings from $0.28 to where they are today as $0.49. And now you’ll flip to Page 4. I want to point out why we think we’re different than some of our peers in the marketplace. Quite frankly you simply can't recreate our investment portfolio. We have critical mass in MSRs, Servicer Advances and when you think about our MSRs and there is a couple of good pages in the presentation which I'll take you through, we own legacy MSRs which should realistically be pretty much agnostic in all interest rate environments. As you look at our liquidity, we have the ability to access up to $1 billion of liquidity. We have Call Rights on approximately 200 billion of the Non-Agency market which is about 30% to 35% on the market and you can see by the right side of our slide, we continue to try to grow our dividends from Q4 ’13 where we were at $0.35 to today where we’re $0.46. On Page 5, we believe that we are currently undervalued by the market. While our performance on a relative basis is good, we cannot take that for granted as the overall market has truly been punished and quite frankly we are disappointed where our stock price is. Currently, we're covered by 10 firms all of whom have a bar rating or overweight or outperform rating on our stock price today. On Page 6, I want take you through the quarter and some of the things that we did and again a very-very active quarter particularly in our Servicer Advance business. We issued the first Servicer Advance deal in 18 months. The affect of that reduced interest rate risk lowered our cost of funds and lengthened the term of our financing. We paid off $2.5 billion of HSART notes which were issued by HLSS and those notes were paid off at par. By doing this, we increased our advance rate by 6% and created an additional $200 million of liquidity. On October 14th, there was a court ruling and as expected there was the court rule there was no EOD under the HSART indenture. The trustee who was holding $92 million of our money in escrow released the money to us, so again another positive liquidity event for the Company. During and subsequent to Q3, we purchased 300 million of Servicer Advance AAA debt with IRRs targeted in the mid-teens. We think the asset class is obviously a very good asset class for us and will continue to generate outsized returns in the marketplace and if you look at the marketplace today on Servicer Advances it's become a lot more active since we issued our first deal last month. For our own Servicer Advance financings we expect to be in the market in the next two weeks with an advance deal as well of about $800 million. In our Call business, we recalled seven Non-Agency deals in the third quarter totaling $216 million and subsequent to Q3 we called another 14 deals in the amount of $360 million. We expect to be in the market early next week with the $500 million securitization. Again we have a good slide in our presentation which will illustrate the economics on how to think about that deal. In Excess MSRs, we funded $19 billion of previously committed MSRs that we announced last quarter. As we think about our Excess MSR business and from a licensing perspective, we’re currently working on getting licensed to be an owner of MSRs in all 50 states. Today, we’re licensed in 30 states and we chose this route as we feel it's a much more prudent route relative to going out and buying a mortgage company as we think they should be able to be licensed in all 50 states by the end of, hopefully by the end of the first quarter of 2016. As you flip to Page 7 take a look at new residential today. Again we have critical mass in our three core investment areas. Excess MSRs’ $1.6 billion market value, Servicer Advances of $666 million of market value and you could see in the quarter we despite certain Servicer Advances paying down we continue to increase our investment in that sector. On the Residential Securities & Call Rights, we grew our portfolio approximately 25%, so now capital deployed there is $434 million as of the end of Q3. Again that’s very consistent with our desire to try to continue with our Call Right strategy and to the extent that we can accelerate time as continue to do so. On Opportunistic Investments that’s really our consumer loan portfolio, as well as some loans that we continue to acquire as a result of our Call strategy and cash at the end of the quarter was $348 million and I’ll talk to that a little bit later. On Page 8 and 9, this talks a little bit about our Excess MSR portfolio. I think the story here is a great one. When you think about our Excess MSRs they are not new production MSRs, so what does that mean? What it means is there you’re going to have much more stable prepayments, you’ll have less volatility as the MSRs are backed by borrowers who have been in their homes for approximately 10 years. They have seen the low in rates, they have lower credit scores and higher LTVs. We have stayed very true to our investment thesis and stayed away from newer production MSRs as the volatility on a quarterly basis as rates rally could be a little bit much. If you flip to Page 9, I want to highlight a couple of things why we’re different again in the Excess MSR portfolio. Our net speeds are 38% slower than the industry when incorporating recapture and again that’s coupon-to-coupon. 100% of our MSRs have recaptured provisions whether they are serviced by Nationstar Mortgage or by Ocwen. If you look to the bottom left part of our page, our average loan size of 157,000 versus industry loan size of 198,000, a lower FICO score of 660 versus 731 and our higher LTV of 87 versus 79. All of that means is we’re going to have much more stable cash flows as you think about our business whether rates are higher or whether rates are lower. On Page 10, I want to talk a minute about our Servicer Advance business. Currently, our Servicer Advance portfolio totaled $7.6 billion. The advances are funded with $7.1 billion of debt for 91% advance rate and a 2.3% cost of funds. Our like-to-date investment on the portfolio has been 30%. As you look to the right side of the page, you can see that we had a very active quarter in the business. Again we issued a $1.5 billion Servicer Advance securitization in the first one and 18 months, on that deal we increased our advance rates from 87% to 93%. We lowered our cost of funds from 3.1% to 2.8% and we extended the maturity of our borrowings for up to three years. We also paid-off as I mentioned earlier 2.5 billion of term notes the reason that we were able to do this as Ocwen’s master servicer rating triggered an HSART event of default, which made us again pay off the $2.5 billion of term notes. If you recall back to April when we acquired HLSS, we took out extra financing just to prepare in the event that there were any additional downgrades and we had an extra capacity of approximately $4 billion and we used $2.5 billion to pay for this debt. The effect again of paying off the $2.5 billion of term notes created $200 million of additional liquidity. On Page 11, I want to talk a little bit about this deal, our Call Rights and if you take a look what I want to do is walk you through for a second. This is a large deal, again we expect to be in the market with this deal next week and the way that this deal works is and I’ll start with bullet point two or I’ll start with bullet point one. We’re able to call a deal when the current balance is equal to 10% or lower of the original balance of the mortgage pool that was issued. In this case we purchased 15 million bonds of Non-Agency securities at $0.66 on $1 for a discount of approximately $10 million to par. We then announced that we’re going to call the deal, so we paid $565 million which is $0.100 on $1 versus the UPB of the mortgage loans which is 565 and then you have additional expenses. What are those additional expenses? You have advance balances or advances that you have to pay off. In this case it’s approximately $8 million. We have paring our payments to both Ocwen and Nationstar so each time we call a deal we do pay Ocwen and Nationstar a fee to call those deals. And then we have expenses which could be legal and rating agency expenses, and that's $580 million. When you look as the accretion of the bonds that we purchased at $0.66 will then get paid off at par, so that's 15 million of the difference between 0.66 and par. We then turnaround and we do a secularization in the marketplace, so we’ll take the pool of mortgage loans, we’ll work with the rating agencies and our underwriters and we’ll create a capital structure where we’ll issue AAA down to non-rated securities and the effect of that will generate proceeds of approximately $545 million. And then the delinquent loans that we acquire as a result of our Call Right will keep on our balance sheet and where we’ll see to modify the loans or liquidate the loans overtime. The total profit in this transaction is expected to be something between $10 million and $15 million, so I thought this would be a good way to walk you through and illustrate how the Call Rights work and how this deal hopefully will look in the marketplace as we go forward. Again there is no guarantees on the execution of this, but this is what we expect as we come to market over the course of the next week or so. On Page 12, one of the questions we get pretty frequently is how to think about our Non-Agency pipeline, so what we thought we would do is we put a couple of bullets and really what are the drivers to enable us to accelerate our deal pipeline. So looking to the bottom part again today we own Call Rights on approximately 200 plus billion dollars of outstanding Non-Agency mortgages. We believe overtime all of these deals will be called and the projected balance of the loans at the time of call will be something around $100 billion. To the right, you could see the factors which drive the call ability of these deals. Delinquencies, Servicer Advances, the loan-to-value on the underlying mortgage loans and the bonds that we could acquire at discounts in the marketplace, so we gave a couple of illustrations as far as what would help accelerate the pipeline. For example, if delinquencies declined by 10% we think that we should be able to call another additional 3 billion to 5 billion in deal. If Servicer Advances dropped by an additional 2% we think the effect of that will be to call an extra $1 billion to $2 billion in deal. If the loan-to-value on the underlying loans goes up by 1 point, we think we should be able to call 1 billion to 2 billion in deal. And then the more bonds we acquire at discount the more deals we should be able to call. Again all these numbers are approximate, but we wanted to get you ground and then try to give you a sense of as far as how we think about the callability of these pipelines but as you can see at the left side of the page, currently $31 billion or callable. We're doing $500 million deal next week, we expect to do another deal hopefully in the month of December depending upon market conditions and timing, but overall we continue to work as I pointed out earlier in our presentation we continue to work with our servicer, as well as helped by counsel to figure out a way to try to clean up the legacy mortgage market. Keep in mind, most of these loans that are in these pipelines were issued anywhere from 2003 to 2007, so a lot of these loans are up to 10 plus years seasoned. Now if you’ll flip to Page 13. This goes back to some comments I made earlier about our desire to become a fully licensed or to have licenses in all 50 states and effectively what this would do as it would give us the ability to own MSRs, continue to work with our servicing partners to the extent that we wanted to do diversify, we could do that as well. So overall we think hopefully by the end of Q1, we should be licensed in almost all 50 states and again there is no guarantees on that, we're currently licensed in 30 states. We still need to work with the agencies to get approvals with Fannie, Freddie and Ginnie which we hope to be able to do that over the course of the next kind of three to six months, but we think it's a good, we think it's prudent and it will give us a little bit more flexibility in our business. On Page 14, I mentioned earlier how we think about our business and why we try to be as agnostic as we can to movements in interest rates and just to take you through a few bullets here. On interest rates, Excess MSRs are one of the few fixed income assets that should increase in value as interest rates rise. The underlying mortgages are less likely to be refinanced as interest rates rise, that's extending the life of the servicing fee stream, should interest rates fall we have recapture provisions with Ocwen and Nationstar, which will help mitigate any increase in voluntary prepayments. On Servicer Advances we have agreements with our servicing partners to protect us in the event that interest rates increase on our Servicer Advances to the extent that rates drop our financing cost should decline, so again that would be a benefit and then on the Non-Agency securities almost all of our securities are floating rate, so should rates rise we’ll get higher coupons and theoretically that will minimize the impact of a rise in interest rates and then should interest rates drop, the value of our Call Right should increase. So as we look to Page 15 and think about 2015 and looking ahead. The year has been really a good one for us, despite where our current stock price is. We’ve reached record core earnings of $0.49 a share in 2015, rolling back to April we acquired HLSS for $1.4 billion, we increased our dividend in both 2Q ’15 and 3Q ’15, we’ve achieved significant growth across all three core segments, we’ve deployed over $2 billion for new investments in the year. And as we look forward a couple of things that we’re working on, I mentioned the MSR licensing, we’re currently working on our applications to become a member of the Home Loan Bank system. The effect of that will give us more liquidity, should lower our cost of financing in certain segments of our business and overall we think it's prudent again to always have the maximum amount of liquidity as possible. Pipelines still remain robust. As we look forward, the Excess MSR pipeline is pretty robust. I would tell you it's not as interesting quite frankly today on the new production stuff, we do think there is going to be more legacy stuff that will come out of the large money center banks and I am sure I’ll get a couple of questions on that. On Servicer Advances, we continue to deploy more capital there, we love that asset, it has generated returns of mid-teens and upwards of 20 and then on the Non-Agency business, we continue to deploy more capital on the Non-Agency business. And then behind that is our portfolio update which I am not going to go through at this point and with that I’ll turn it over to the operator for any questions.

Certainly. [Operator Instructions] Your first question comes from Bose George from KBW. Your line is open.

Just first on the MSR, the servicing licenses that you're getting, when you think about it once that’s done, can you just sort of characterize the potential opportunities away from Nationstar and Ocwen and could that become a pretty meaningful part of your business?

Yes I think it's less about moving any business from Ocwen and Nationstar quite frankly. It's more just to give us flexibility. In the event for example that Nationstar and or Ocwen could be in the middle of a servicing acquisition where they are boarding new loans and in one of the money center banks for example comes to market and says, I want to sell X billions of dollars of servicing, we need to have the flexibility to be able to participate in a transaction like that. So it's again to move stuff away, but it's just to be able to give us more flexibility in our business.

Yes and I understand, but in terms of is it could be sort of see a scenario down the road where there is a meaningful amount of servicing from other sources as well that you guys end up funding?

Yes, I mean Bose if you think about it we’ve had our partner Nationstar which we continue to work on pools of MSRs, so for example if Nationstar did not want to participate on an MSR transaction or we did not for that could go the other way, if Nationstar did not and we wanted to we could then acquire the MSR and have it sub service at Ocwen, Nationstar or any other servicer. So that’s the way that we’re thinking about it. It's not to get in the operating business, it's just to give us a little bit more flexibility around our business.

And then just one question on the GAAP versus core reconciliation, the non-capitalized transaction related expenses, what are those driven by?

I’ll turn that over to Nick.

Sure. One of the items we had during the quarter was a $9 million expense we incurred relative to the HSART term notes, so that’s the largest item in the quarter.

Your next question comes from the line of Doug Harter from Crédit Suisse. Your line is open.

I just wanted to confirm that the 500 million on the Call Rights that’s an addition to the 360 you did in October fiscal ops?

No, what happened as we called the loans in September, we called 200 million or seven deals in September, we called in an additional 360 in October, we haven’t issued that securitization yet and we’re going to do that over the course of the next week.

So this is basically it is, okay so is that where the profitability -- is that sort of where you generate the profit on the securitization or on the call, I just want to sort of understand the economics?

You’ll realize the economics when you do the securitization. Obviously if you keep the loans on your balance sheet you’ll realize interest income. But the so called arbitrage, the difference between your par pricing and your securitization will occur when you price the deal and actually keep the securitization.

So that’s a chop in the fourth quarter then?

Correct.

And you said you were hopeful to do another securitization in December or another collapse in December?

Both we’re hopeful that we’re going to call another pull of loans and then issue another securitization in December.

And then obviously it’s market dependent based on the sectors you laid out in the slide, but I guess as you look out into the early part of 2016 how do you see the pacing of both collapses and securitizations?

I think we are doing everything we can to accelerate timelines on the securitizations and Call Rights. I mentioned earlier in my comments we've engaged outside counsel we're working with bondholders, we're working with servicers, the feeling is if we can clean up the legacy mortgage market of which we own a significant amount of calls related to that business it should bear great fruit quite frankly for our company and our shareholders. It is also a very good quite frankly for the servicers as servicing delinquent loans is not a profitable business as we know and it will be very good for bondholders and we are bondholders as the discount to par would get accelerated. So we think it would be a win for the entire market and that's something that we’re working very aggressively on that is no guarantees that we’re going to be able to do certain things but we are doing all we can to do so.

And your next question comes from the line of Jessica Ribner from FBR Capital. Your line is open.

Just a timeline question around the acquisition pipeline, because it seems significantly -- because you are getting the MSR licenses or are you kind of if we’re looking at the same PLS deals and how can we think about that on the MSR side?

I don’t want everybody to really over think the licensing thing it's something that we've been talking about I think quarter-after-quarter. I've discussed on previous calls whether or not we’re going to acquire a mortgage company so we have a little bit more flexibility so the licensing is again not to get in the operating business because to the extent that we acquired a pool of MSRs we would likely go to our servicing partners to have them service to the extent that they weren’t in the middle of a transfer and they would get approved by the various regulatory bodies. So the licensing thing just gives us a little bit more flexibility again if Nationstar did not want to participate or another partner did not want to participate in the acquisition of an MSR we just have a little bit more flexibility. The pipelines are still the same. The legacy 75 billion that we've spoken about on previous calls is still out there it's still there is still quite frankly working through the legal side of the bank and we are hopeful that will come to fruition at some point it's obviously a lot slower than we thought. On future acquisitions we are likely not going to embark on an aggressive program to acquire new production MSRs as we don’t think, one is, it's hard to recapture those borrowers and two it's not consistent with our investment strategy and three is we have 1.6 billion of capital already deployed in the MSR business. While saying that the banks are going to continue to come, I think with a lot of Ginnie Mae products so we should be able to acquire more Ginnie Mae product if it comes at the right levels. So pipelines are still robust we will still continue to focus on legacy stuff, the pipelines are Non-Agency legacy MSRs, so you are getting towards the -- you are in the 8th inning of being able to acquire the legacy Non-Agency stuff but it is still out there and we will continue to do what we can to acquire them. So I don’t think anything has really changed and the licensing just gives us a little bit more flexibility to do what potentially we will need to do.

And just a kind of follow-up to that, do you have any appetite for acquiring whole loans either re-performers or in the early stages of let's say that step ups or anything like that?

Yes. I think I mean yesterday Fannie Mae auctioned off a pool of 1.3 billion of loans, there is a bank that is selling I think 800 million of loans tomorrow we’re taking a very hard look at that and the return if you go back a few quarters our success in the loan business was pretty significant I think we generated north of the 30% IRR on our loan business and then we sold some of those loans to help with the proceeds for the HLSS acquisition, so it's something that we’re looking hard at if the returns are there I think we potentially will deploy some capital in the loan business to generate returns for our shareholders.

Your next question comes from the line of Jeremy Campbell from Barclays. Your line is open.

I just wanted your follow-up on that last question. So if you guys think you are in the 8th inning of acquiring Non-Agency MSRs what is really the strategy going forward and how long is this really going to be part of the core thesis for NRZ?

Well we have 1.6ish billion of capital deployed in MSRs. The Ginnie Mae business you will see plenty of MSRs continuing to come out of the banks as it relates more probably on the Ginnie side. On the Non-Agency legacy side again we own north of $200 billion of MSRs linked to the Non-Agency business the outstanding Non-Agency legacy market is probably about $650 billion today. We own a pretty significant amount of that there will still be stuff that will come out. The other thing I want you should really think about is we have recapture provisions, 100% of our MSRs have recapture provisions with our two servicers Nationstar and Ocwen. So to the extent -- particularly on the legacy stuff that somebody does go to reify, we have the ability to recapture that, recapture rates currently on the agency business so 30% to 35% on the conventional side and 20% to 25% on the Ginnie side. On the Non-Agency side they just don’t prepay that frequently because the LTVs are typically higher, the FICO scores are lower, but the recapture rates on that have been creeping up as well. So it's a very, very sustainable business, we think its cash flow stream will be out there for many, many years. So it is still a core part of our business.

And if Nationstar and Ocwen continue to grow with lenders like they continue deposit to the market, why shy away from new production. If they grow with lenders or inherent recapture it on new production should theoretically be higher. Correct?

Newer production loans typically the borrowers have a lot more optionality than a legacy borrower with a low FICO and a high LTV. So recapturing the new production borrower is a much more difficult task than on the legacy side. And also if you look at bank earnings for the quarter there was a lot of P&L volatility around bank earnings as it relates to new production MSRs and that MSR streams so it’s much more linked to interest rates and as I pointed out earlier in our presentation we try to be as agnostic or as market neutral as we possibly can.

Then as we think ahead, you had some bleed-off in your book value from MSRs and advances coming down. What’s your outlook on being able to acquire MSRs or advances going forward to at least maintain kind of book value stability as we look ahead?

I think it's pretty significant. We deployed more capital in the quarter in Servicer Advances, we’re going for example Ocwen is in the market now with a Servicer Advance deal rated AAA debt we’re taking a hard look at that. So we think we’re going to be able to deploy more capital in Servicer Advances. MSRs again is the core part of our business. We’re not going to buy -- I think our shareholders hopefully will reward us for not spending every dollar the second it sits in our pocket quite frankly. So we’re going to be very strategic on how we deploy capital and MSRs, we do have interest rates of -- it was a very volatile quarter for rates. If you look back to where we ended Q3 versus where we are now the 10 year note is back to kind of 218. So we just want to make sure that we’re careful not to deploy capital too quickly on asset classes that are going to go down a lot in value and we…

Okay.

So…

And then just finally is there any appetite between you or Nationstar as far as acquiring MSRs off their balance sheet once you get the license here?

Again MSRs are a record part of our business, there is always that appetite to acquire more MSRs.

Your next question comes from the line of Jason Deleeuw from Piper Jaffray. Your line is open.

A question on the Call Rights and the securitization, I just want to understand the cash flows from a securitization. Is there so the upfront gain I guess it would be -- would that be a net positive from a cash flow standpoint? And then is there going to be an ongoing cash stream from owning the NPLs on the securitization, is that the right way to think about it?

It is, so it is yes and yes Jason so you will have a net gain on your call strategy and then you will have your NPLs in your -- as we liquidate or modify those loans, those will flow through our balance or our income statement and be accretive to earnings.

So from a dividend standpoint in terms of the cash that is going to be generated would there be like a special dividend if the gain, the cash gain is big enough on the securitization? And then can we think about the ongoing NPL investments is kind of the supportive of run rate go forward dividend?

We did if you go back I guess about a year or year and a half ago, we did have a special dividend. Quite frankly I am not sure that we got rewarded for it. So I think likely our strategy would be to continue to grow our earnings and grow our dividends, not just our special dividends. And that’s kind of the way that we’re thinking about it rather than just pay out a special.

In terms of the size of the cash flows from a Call Right securitization, what would be the bigger, and just directionally, what would be the bigger cash flow is it the gain on the securitization or is it kind of the ongoing stream?

I think it depends on the size of the deal, it depends on how many NPLs you're keeping and it depends quite frankly on the profitability of the securitization. Whether you're making 1 point, 3 points or whatever that number ends up being, I think it all depends on those factors. So again it is the size of your loan that you're taking back, the size of the deal and again the discount you have on the underlying bonds.

And then on the Ginnie Mae legacy MSRs, I believe the return profile on those are a little bit less than what you guys kind of have right now for your MSRs. But you're still under-levered and you could still put capital to work. So can we think of as investors, can we think about like when you're adding future Ginnie Mae legacy MSRs can that be dividend accretive dividend per share accretive overtime is that the right way to think about that?

Yes, no absolutely. If you look at the Ginnie business when Ginnie Mae lowered the mortgage insurance premiums you saw speed pick up pretty dramatically on the Ginnie Mae cohort. The good news for us is we are very light in the Ginnie Mae investment, so even on some of the legacy stuff you saw some fast speeds going back to Q2 we’re starting to see speeds come off on all parts of MSRs again year in year out a little bit of a higher rate environment today not necessarily throughout the entire quarter, but you are also coming into a time when seasonals are going to come into play so we think speeds will continue to drop. A good chunk of our Ginnie Mae MSRs we acquired in -- we bought $20 billion for example in May and those boarded in May so overall we've tended to -- we haven’t had a lot of Ginnie Mae exposure I do know that the banks will continue to sell more Ginnie Mae product, if the numbers work Jason we will continue to deploy more capital there is the way to think about it.

And then on the Federal Home Loan Bank membership, can you help us understand what assets you can fund with the flip financing and just what size can you get in kind of cost of funds savings you think you can get with that timing?

The way it works here is we are currently setting up a captive insurance business in Tennessee from there you work with the home loan bank and we are working with our home loan bank at Cincinnati that we went to see a number of months ago, typically they will finance agency stuff we are working with them on the they will finance agencies, they will finance loans and once we are a member we will work with them quite frankly in every part of our business. Because again we are one of the largest providers of capital to the servicing industry and I think it would be a great thing for example if we could finance advances there I don’t know that we can, but it's just -- we will work with them on every asset quest that we’re involved in.

And then the last question is on the litigation in the escrow release so is this HR litigation with the release of the escrow is that litigation out is that done now or is there still something left for their -- left there?

No it's done it's over. So we’re happy with the result we’re happy to get our money back it was a very good liquidity event for us. I think it cleaned up a lot of noise in the market and we look forward to deploying that capital in a meaningful way.

[Operator Instructions] Your next question comes from the line of Michael Kaye from Citigroup. Your line is open.

Given some of the volatility in the capital markets, can you talk about how that impacts the two to three points you typically quote on the Call Right net gains what's the volatility and kind of making things better or worse?

Obviously as spreads widen or assets could become cheaper you won't make as much money. I think in our deal that we’re coming to market with over the course of the next week, it's currently sized based on what we believe our current market conditions and the economics are hopefully reflective of where we think we're going to be able to execute in the marketplace. So we feel pretty good about where we are you can think about it two ways right, we are issuing $500 million securitization now hopefully another one in December the flip side of that is as we have plenty of capital to deploy and should assets get much cheaper we will be able to deploy capital in these same asset classes in a way that becomes very accretive for our business, so I think there is two ways to think about it but the current deal that we’re in the marketplace with and will be in the marketplace with over the course of the next week, is being the economics are sized based on the way that we anticipate the execution will occur.

And I think let’s say I'm just looking ahead looking on the drag from the cash balances this quarter sometimes you give a impact per share how much that partners only had a bunch of stuff to close so far in Q4 anyway to think about it?

Yes. Just a quick walk as of 9/30 I think our cash balances were about $350 million if you take a step back we have a dividend payment of $106 million so we always want to make sure we have enough money to pay your shareholders. Then we also had fundings of previously committed MSRs of about $120 million so while there is a cash drag we need to have cash on our balance sheet to kind of pay for things. One of the things that I think the team has done a great job in doing is clearly we have a lot of capital deployed in the Servicer Advance business so one of the things that we've done over the course of the past month is worked with our lenders to be able to pay down Servicer Advances and re-draw that capital within a 48 hour period of time so the effect of that you will see on a go forward basis is if we don’t find an investment that we believe we want to deploy capital and at that time we will be about to pay down some of our Servicer Advance debt which will reduce our interest cost but in the same token should we want to get that capital back we could do that with 48 hours notice so that's a I think a terrific cash management tool for our company.

And I think let’s say you did $0.49 par for your dividends, $0.46 and you have a bunch of stuff going on in Q4. Anything you could say in terms of the outlook for the dividend from here and into next year?

The answer is no, I’d like to -- everybody always wants forward guidance. We can’t give forward guidance, the one thing I could tell you on behalf of me and our team is we’re doing everything we can to execute. In our core business, we think our underlying results have been terrific, the stock price does not reflect that, I think a lot of that has to do with the current environment and the marketplace, not only us but a lot of our peers. I think are trading at very attractive values quite frankly. But going forward we’ll continue to do the same thing, have good quality earnings which will hopefully lead to higher dividends for our shareholders.

Your next question comes from the line of Matthew Howlett from UBS. Your line is open.

Mike just getting back to the excess capital position, what do you define, what can we define as excess capital of NRZ and I say that because you have that 75 million JPMorgan deal out there and I think there is a perception out there that the company is always willing to raise equity it is reported above most of your peers aren’t to drive additional acquisitions for your pipeline?

And here is what I would tell you on liquidity, we have the ability we believe to draw an approximately $1 billion. I don’t anticipate and I don’t think anybody here anticipates us raising equity anytime soon. And there is no reason quite frankly to raise any equity. So I think we were very clear on our last earnings call we have no desire to raise equity for the company. I think when you think about us here, quite frankly I have a lot of my own personal net worth invested in this company and I think all of our interests aligned whether it be myself or anybody here at fortress to see our stock price do better. There is no desire to raise equity, we don’t need any equity and I think anything will do in the market we’ll try to do that for our own balance sheet. So I wanted to spell that notion about us getting out there to raise equity. We’re not raising equity, I mean it is just -- I can’t be any clearer on that. We were clear last quarter and I am going to be clear now. We have plenty of capital, plenty of liquidity, plenty of ability to draw on liquidity, so we feel like we’re in a great place.

Yes I appreciate that, that’s helpful because certainly there is a perception out there whether it is from your predecessors, from the mortgage REITs just your relation in the equity. But maybe help me understand, when I look at your cash flows over half of your Excess MSR cash flows half are coming from HLSS would use as a significantly lower equity cost of capital. I mean what are we missing here, is energy and there is plenty of things going on inside it and we can’t really harvest or appreciate the steadiness in the cash flow is coming from the MSR portfolio?

I think what we’ve done over the course of the past couple of years is really try to dummy down the business. I think getting people grounded on the Call Right strategy is something that we try to do quarter-after-quarter. I’d love to get specific and tell you that we’re going to be able to call 3 billion a quarter, or 5 billion a quarter, or 10 billion a quarter whatever that number is. We just can’t do that. I think part of it is the market where we currently are and again as I don’t want to our self into and with everybody else and our peers are quite frankly they are close friends. But I think the sector as a whole has taken a pretty good hit overall. The only thing we can do is continue to try to generate good quality earnings and hopefully that will have the stock right itself. We currently trade at roughly a 15% dividend yield, I pointed out earlier if you go back to in a normalized environment whether that’s a 7%, 8%, 9% or 10% dividend yield, we think that the -- our valuation is very low and very cheap. However we got, we have to continue to execute in our business. So I don’t know what else to tell you about that.

No obviously if we think it's going to happen it might take all, but it's glad that you guys are focused on it. And then just on the Excess MSRs and you commissioned JPMorgan deals being hung-up, I mean pricing I mean are we -- there is got to be a -- pricing has to be attractive right the sort of the dented stuff, I mean are there any really buyers out there that starting with it doesn’t feel like there once was I mean with all the servicers down, I mean price is still attractive extended some of the stuff that still comes out you still can do some of the bashing with IRRs if you’ve done on prior acquisitions?

I think the best investors in MSRs were the early ones obviously.

Right, right.

While saying that I think there will still be stuff to do, it's going to be a little bit more episodic, working closely with our servicing partners not everybody could service a delinquent loan, we know that Nationstar can serve us a delinquent loan. We know that Ocwen can serve us a delinquent loan. So I would say that while it will be episodic, we have very good relationships with the banks, we’ve been doing this a long, long time, I think we have some good credibility with the banks and hopefully we continue to execute on that strategy. So it's going to be a little bit more episodic than it was going back to a couple of years ago.

Your next question comes from the line of Jason Weaver from Sterne Agee. Your line is open.

Most of them have been answered, but I was wondering if you could just comment on the specific execution parameters of the Servicer Advance securitization?

Sure. I mean typically when we do the Servicer Advance securitizations our advance rates are anywhere from call it 91% to 93% and our cost of funds are given approximately 2.5ish percent. As you think about that we have a number of facilities with our bank partners, some of the stuff that's on bank lines we are able to actually reduce our cost of funds when we come to the public market at times extend terms as well meaning the term of the financing so the next advance deal will likely be a 92ish percent advance rate with hopefully something in the 2.5 to 2.75 cost of funds.

This concludes our question-and-answer session. I turn the call back over to Michael Nierenberg, CEO.

Well, thanks everybody for dialing in. We appreciate all you support and we will continue to do all we can to help create value for you and our shareholders. Thanks.

This concludes today's conference call. You may now disconnect.