Rithm Capital Corp. (RITM) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Carol, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Residential First Quarter 2017 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Mandy Cheuk, Investor Relations.

Thank you, Carol, and good morning, everyone. I would like to welcome you today to New Residential’s first quarter 2017 earnings call. Joining me here today are Michael Nierenberg, our CEO; Nick Santoro our CFO; Jonathan Brown, our CAO; and Cameron MacDougall, our General Counsel. Throughout the call, we’re going to reference the earnings supplement that was posted to the New Residential website this morning. If you have not already done so, I would suggest that you download it now. Before I turn the call over to Michael, I would 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 earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we’ll be discussing some non-GAAP financial measures during today’s call. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings supplement. And now I would like to turn the call over to Michael.

Thanks, Mandy. Good morning, everybody, and thanks for joining our Q1 earnings call. In the quarter, we had a very busy quarter. We deployed $1.6 billion of capital across all of our core business lines. We raised our dividend by $0.02 from $0.46 to $0.48. All segments of our business continued to perform as expected, and quite frankly, yes, pretty terrific. We have positioned the company today to do well in all interest rate environments. While saying that, we do believe that the Fed will raise rates at least two to three more times this year. We’ve positioned our servicer advance business to protect us from rising rates by converting our financings to fixed-rate and locking in longer maturities. We continue to add to our bond portfolio as we have accelerated our call strategy. In our bond portfolio, we have an unrealized gain of $162 million, and for the quarter, we are higher by $35 million versus last quarter. We will and continue to work with all of our servicing counterparties, trustees and rating agencies to figure out a way to accelerate our call right strategy with our eventual goal of calling each and every mortgage deal where we own the call rights. In the quarter, we called 45 Non-Agency deals. This represents the busiest and largest quarter so far from a call rights strategy to date. This represents a collateral pool of approximately $1.2 billion. In our MSR business, we closed the Citi purchase of just under $100 billion of MSRs and raised capital around that acquisition. We also acquired another two portfolios of MSRs totaling approximately $15 billion. I’m also thrilled to announce, we have agreed in principle on a strategic business deal with Ocwen, which will be beneficial to both parties. We’re very excited about this and continue to hammer out details as we speak. I’ll speak to this shortly. So all in all, a very good quarter. And now I will take – I’ll walk you through our supplement, which has been posted online. I’m going to begin on Page 2 and just begin with our financial overview. For the quarter, our total return was 11%. As I mentioned before, we deployed $1.6 billion of capital in the quarter. Our year-over-year book value increases up 11%, and our current dividend, as of the end of March, was 11% – our dividend yield was 11%. Today, we own a little bit under $600 billion between Excess MSRs and full MSRs. We own call rights of approximately $165 billion, which represents approximately one-third of the outstanding Non-Agency mortgage market. Our portfolios are positioned for all interest rate cycles. And we continue to work with our different servicer counterparties while stabilizing the system and trying to ensure success for all parties involved. On Page 3, our financial performance. Our GAAP net income for Q1 was $121 million or $0.42 per diluted share. Our core earnings were $155 million or $0.54 per diluted share. And as I pointed out before, we raised our dividend from $0.46 to $0.48 or $148 million for the quarter. Outstanding shares today are $307 million – 307 million shares. First quarter highlights. In March, as I pointed out, we acquired $92.5 billion UPB of seasoned agency arms from CitiMortgage for $906 million. We also acquired, as I pointed out, two smaller pools of about $15 billion of agency MSRs from two different sellers; United Shore and RCS. Throughout the quarter, NRZ continued to purchase monthly flow from Walter of $1.3 billion. And to further enhance liquidity, we secured MSR financings of $800 million. On a servicer advance segment, we continue to improve our funding by changing our floating rate funding to fixed-rate funding as we do believe the Fed is going to raise rate by two to three times this year. In February, we issued a $400 million deal of four-year fixed rate term notes. And during the quarter, we refinanced $1.65 billion of debt from floating rate to fixed-rate debt. In our Non-Agency security and call right business, I pointed out, we executed clean-up calls on 45 different season Non-Agency deals totaling $1.2 billion in the quarter. We completed two Non-Agency loan securitizations of $1.4 billion, $773 million which closed in March, and then subsequent to quarter end, we did another $668 million in April. We acquired $5 billion of call rights during the quarter, increasing our call right portfolio to $165 billion. We also purchased $2.1 billion current face of Non-Agency RMBS, increasing our net equity by $260 million in the quarter to $1.3 billion. In our consumer loan segment, we announced a deal where we became part of a four member consortium, which agreed to purchase up to $5 billion of consumer loans on a forward flow basis from Prosper. Again, we increased our dividend from $0.48 – from $0.46 to $0.48, and we raised $834 million of equity in conjunction with our purchase of the mortgage servicing rights from Citi. On Page 5, what is New Residential today? And all of these numbers are net as of – net of our financing on the assets. Excess MSRs as of 3/31 were $912 million of net equity. Our full MSRs were $1.2 billion of net equity. Our servicer advance segment, $96 million of net equity. Our residential securities, $1.3 billion of net equity. Our residential and consumer loan portfolio, $469 million of net equity, and we closed the quarter with $237 million of cash. I’m now going to talk a little bit about our portfolios. I’ll begin on Page 7. In the upper left part of the page, you could see, our first quarter acquisitions $92.5 billion from Citi, $9.8 billion from United Shore, $5.1 billion from RCS and $1.3 billion from Walter. And then you could see to the right side of the page, $67 billion of MSRs purchased from PHH. We expect that to close early June, subject to all the appropriate approvals from the regulatory bodies and PHH’s shareholders. We purchased $32 billion from Walter; $33 billion from WCO, which was Walter’s REIT; $13 billion from FirstKey; and then another $5 billion from Walter that’s settled in 2016. As you look to the bottom left part of the page, our Excess MSR portfolio $326 billion total. Remember that is a very, very seasoned portfolio. More credit impaired than others, current FICO 664, and with a delinquency profile of 12.4%. As you look to the right side of the page, our full MSRs, $252 billion, 4.3 gross WAC, 68 months seasoned, 67 LTV and a very low delinquency. Keep in mind, on all of these portfolios, we have recaptured provisions in place with our existing servicers and sub-servicers, which should protect us in any falling rate environment. Page 8, our MSR portfolio what sets us apart from the rest. 72% of our portfolio is well seasoned or recently recaptured. Our prepayment speeds are very stable. And despite – when you think about a lower rate environment, if you look at the right side of the page, the industry average is 17 CPR, our net CPR on our overall portfolio is 12 CPR. We’re able to do this through the nature of our seasoned portfolio, and again as well as our recapture agreements that we have in place with our existing servicers and sub-servicers. On the servicer advance segment, I pointed out before, we have $96 million of equity in that. Our total servicer advance portfolio is $5.2 billion. It’s funded with $4.9 billion of debt and a weighted average interest rate of 2.9%. And I pointed out before, during the quarter, we issued $400 million of four-year fixed rate term notes. So as you look to the right side of the page, 93% of our advance debt has maturities greater than two years. So we’re very – so I would say, when you think about our advanced portfolio, away from balance is declining and I’ll talk to that in a bit, it should hopefully be on autopilot as we go forward. Our Non-Agency securities and call rights, again, $165 billion UPB of call rights, approximately one-third of the legacy Non-Agency mortgage market. We will and continue to do everything we can to accelerate that call population. If you look at the left side of the page today, there are $33 billion of deals that are currently callable. To the extent that we can lower delinquencies and advance balances decline, we do believe you’re going to continue to see a lot more activity in those. The other thing is, keep in mind, these are very seasoned portfolios. As time goes by, delinquencies will continue to get cleaned up. This will enable us to accelerate the call strategy. On Page 11, our SpringCastle investment continues to perform extremely well. I’m not going to spend a lot of time on this. And again, this is a consumer loan portfolio that was purchased in 2013. We refinanced it a couple of times, and it’s likely that will stay outstanding as a secured term financing with results expected to be in line with what they currently are. I mentioned before, our investment with a four member consortium of which we’re one of the parties in Prosper. So the deal on that is we agreed to purchase up to $5 billion of unsecured consumer loans on a flow basis. We’re doing this in conjunction with Jefferies, Soros and Third Point. We currently on our portfolio have about $250 million of consumer loans. The consortium will roll out likely this week a securitization on these loans. And to the extent that Prosper delivers up to $5 billion of loans over a two year time frame, the consortium will earn warrants to purchase shares of Prosper equity as these loans are purchased on a flow basis. Page 13 speaks our portfolio. We do believe we’re positioned both in higher and lower interest rate environments. We always like to show you what happens. So for example, in a higher interest rate environment, it’s very good for MSR business. Low interest rate environment on the MSR business, we have recapture provisions in place. The way to think about that is like having an insurance policy. So that should perform extremely well in both scenarios. On our Non-Agency securities and call rights should rates rise, almost all of our bonds, the existing bonds we own, are floating rates. So you’re going to get higher net interest income on your underlying bonds. The flip side of that is when we issue fixed rate securitizations, you’ll get lower proceeds. So net-net, we feel that, that will be a neutral to positive event. Servicer advances, we think those will continue to come down over time. And then on the consumer loan portfolio, we’re pretty neutral on that because the SpringCastle deal has been outstanding, and these borrowers have been in those deals for quite a bit of time. Finally, on Page 14 and then I’ll talk a little bit about Ocwen. 2017 and looking ahead, we are very excited about our results. We think we had a good quarter. We continue to do anything and everything we can to generate good solid results for our shareholders. As we think about the Fed and raising rates, we have interest rate hedges against our funding, all on the short end. That should protect us as rates rise. We have the ability currently being that we’re licensed in all 50 states to acquire MSRs both with our servicing partners and independently. We see a robust pipeline across pretty much all of our key segments. And then we remain optimistic in our ability to deploy capital in 2017 with mid-teens type returns. Now I want to spend a minute or two on Ocwen and then we’ll open up the phone calls to conversations – for questions. Since day one in 2015 when we acquired HLSS, Ocwen has been servicing this portfolio for a long period of time before we even got involved. When we purchased HLSS, we were very clear to the market that we wanted Ocwen as a key servicing counterparty for us and we would continue to work with Ocwen in the long run. Now in light of the recent events, we’ve had a number of questions on how we think about Ocwen, how we protect ourselves. And again, I think going back to 2015, having Ocwen as a healthy counterparty to the mortgage servicing system is something that we think is extremely important. So over the past week or so and well into the night and into this morning, we’ve been talking to Ocwen about figuring out a way to do a deal that should work for both counterparties or both parties, I should say, that will ensure success for us and ensure success for Ocwen in the long run. So we’ve agreed on a deal in principle with Ocwen, and I’ll walk you through the points. Now it’s not finalized. So we have a lot of work to do over the next couple of days. I know Ron and his team are going to do earnings on Wednesday. But here are the highlights on the deal. We’ve agreed to pay Ocwen $425 million for Ocwen’s portion of the $117 billion of mortgage servicing rights where we own the Excess. That $425 million will be funded as the PSAs are transferred into NRZ’s name. We expect that process to take, hopefully, it’s a short period of time, but we have work to do with the rating agencies, trustees and others to effectuate the transfer into our name. That process will begin immediately. We’ve agreed to hire Ocwen as a sub-servicer to a multiyear contract of approximately five years, and then we’re going to pay Ocwen a subservicing fee associated with that contract. Part of the deal, NRZ will purchase 4.9% of Ocwen’s common equity, which is about 6.1 million shares for $13.9 million that’s as of Friday night’s close. NRZ will work with Ocwen on the advanced policy, and we hope to lower the advanced balances in the near term by a significant amount. We’ll also – NRZ will also fully control all of the downstream services associated with this portfolio. Ocwen will provide portfolio defense services for NRZ, and the contract will have standard rights, reps, warranties and termination events as we do with all of our existing subservicing and servicer counterparties. So overall, we’re extremely excited. I believe Ocwen is extremely excited about this deal. We think it’s a win-win for both. It will be beneficial not only to us, but we believe to the entire mortgage servicing and mortgage origination business. And with that, I’ll turn it over to the operator and look forward to answering any questions. Thank you.

[Operator Instructions] And our first question this morning comes from Jessica Levi-Ribner from FBR. Please go ahead.

Hey, good morning. Thanks so much for taking my questions.

Good morning, Jess.

On the Ocwen deal that you were just talking about, would you bear the viability, the regulatory viability if the regulators didn’t like how Ocwen was servicing the loans. How are you going to manage kind of that regulatory exposure?

Like we do with every other servicing counterparty. Ocwen is the servicer that will face the consumer. There will be no change in how that works. We’ll have standard rights in our servicing agreements with them that protect us from anything that, quite frankly, would go – could go potentially wrong with the regulators. But I will also say, when we look at Ocwen’s servicing performance today versus where it has been, we don’t see any deterioration at all as it relates to Ocwen’s servicing practices in dealing with us on our Excess MSRs that we own.

Okay. And so since you’re going to be buying the full MSR – on the MSRs with the Excess that you own the $117 billion, will your economics increase? How do we think about that?

The economics will increase. I don’t want to give anybody a number today. I think over the course of the couple of days, because as I pointed out, everybody has been working through the night on this, the economics will increase. There will be a boost to core. But again, I don’t want to short the market a number today, we’ll come out with more details hopefully over the course of the next couple of days as we finalize agreements with Ocwen. But it will be an increase in our core earnings.

Okay. And then with an increase in our core earnings, how do you think about your dividend policy here?

Once we finalize our numbers, I’ll let you know.

Okay. And then one last one from me. The economics on the call rights. Are they still around 2 points?

Yes.

Is that how we should thinking about it?

On the call rights that we have on our own portfolio, the deals have averaged in most cases minimum of 2 points. In April, for example, we did a large kind of seasoned prime deal where we acquired call rights from a couple of banks. The economics on that are a tad less, but in general, I would assume it’s steady as she goes.

Okay. So around 2 points. All right. Great thanks so much.

Thank you.

Our next question this morning comes from Michael Kaye from Citi Group. Please go ahead.

Just one quick question on the Ocwen announcement. Is there any implications to any of your debt, any sort of agreements you need to get with the banks to make this transaction happen?

No. I mean, its – the way that we anticipated $425 million, it will be funded in stages. So as you think about equity, we intend to fund this out of our existing business today. As we go forward, there is really nothing related to the debt with our lenders. So the answer is, no, Michael.

Okay. And just moving away from this Ocwen deal just strategically, your MSR portfolio is up to almost $600 billion, bond portfolio is growing bigger and bigger, the call rights strategy is really starting to work. Is there any thought or interest in potentially spinning out the MSRs into a separate vehicle and leave the other plus the portfolio more of like bond call right company?

Not at this time.

Okay. Thank you.

Our next question comes from Bose George from KBW. Please go ahead.

Hey, good morning. Actually, just on the Ocwen deal, again. Do you need approval from the bond trustees for that transfer to happen?

We do, and that work is beginning today, tomorrow, this week, but we do.

And then you noted that you’ll have control over the downstream revenue, is that a source of sort of incremental return for you guys as well?

It could be. Again, the deal has been coming together over the course of the past 24 hours or so, but it could be.

Okay. And then just – I know it’s too early for you just to sort of put a number out there, but we know how much capital you’re investing and we know what your hurdle rates are and is that kind of way to think about what you would like to get on that capital?

Yes.

Okay, great. And then just switching to the quarter. Actually what was the contribution from the clean-up calls to earnings this quarter?

It was about $27 million in our core income.

Okay, great. And then just in terms of the book value increase, you mentioned, I guess, $30-ish million from the credit tightening of credit spread. Was the rest of the increase just from the increase of capital raise or is there anything else in the numbers?

Yes, it was more from the unrealized gain on our bond portfolio. Most of the other stuff was pretty steady in the quarter. And then we had some accretion from the equity raise.

Okay, great. Thanks.

Thanks, Bose.

Our next question comes from Kevin Barker from Piper Jaffray. Please go ahead.

Thank you. In regards to the $117 billion portfolio that you mentioned, I believe you have roughly 113 financed as of the fourth quarter. Are there additional MSRs that you’re purchasing from Ocwen beyond, what is already financed by NRZ?

No, it’s that portfolio.

Okay. And then are there any discussions around switching these tax systems used by Ocwen in regards to that portfolio given the issues that have been raised by regulators over the past few weeks?

Yes, I mean, the one thing I would tell is, we’ll evaluate all aspects of this deal to make sure it works for – quite frankly, it works for us and works for everybody. And more importantly, that it works for the consumers and everybody else. So I think it’s important to note that we have this agreement now, we’ve got a lot of work to do to continue to finalize this. And while saying that, if you think about this system itself, great for Ocwen, great for us, great for the consumer. And then, we got to figure out the rest of it and make sure it works for everybody.

Right. And then in regards to the servicing that you would be purchasing beyond the cash flows or the servicing fees that you’re going to retain, will you have full economics over the direction of those assets beyond just the servicing fees?

Meaning, I’m sorry I didn’t understand the question.

Meaning, call rights or other services provided around the servicing portfolio.

Yes.

And then in regards to the call right strategy, you took $27 million as you stated with Bose’s question earlier in the first quarter, and it seems like you completed another mortgage-backed security in April. Do you expect similar economics going into the second quarter, given the timing of the call right strategy as it exists now?

Yes, I pointed out the deal we recently did is probably a tad lower from an economic standpoint as it was more prime in nature. But going forward, we have a number of notices in on additional call rights for the quarter. So I think that we should have, hopefully, a similar result this quarter. But again, I can’t promise that, but it’s our expectations that based on the call rights that we – or call right notices we’ve submitted for this quarter, we hope to have a similar result.

Okay. And then in Ocwen’s presentation, you mentioned the sub-servicing contract with NRZ, it’s worth roughly $900 million in fair value. Do you view that portfolio having a similar value over the long run?

We view that portfolio – I mean this is the way to think about this transaction. We owned the Excess before. Now we’re buying Ocwen’s piece of that MSR, then we’re going to sub-service it back to Ocwen. As far as the overall economics, again, we try to target mid-teens type returns on our investments. And I think that’s probably the best way to guide you on that.

Okay. Thank you for taking my questions.

Thanks.

Your next question comes from Trevor Cranston from JMP Securities. Please go ahead.

Hi, good morning. Thanks.

Good morning.

One more question on Ocwen. They announced that they are going to challenge the seasoned assist orders that they got from, I think, Massachusetts and Illinois. Can you say, how much exposure you have through Ocwen in those two states and what those orders might mean for your investments in the near term? Thanks.

Yes. We don’t – today, obviously, we don’t have a signed deal yet, but we don’t have any – to the best of my knowledge, we don’t have any exposure in those states because we own the Excess. While saying that, I think Ocwen is – they’re going to go down their path, do what they think is right for their company. To the extent that there was some adverse effect somehow in a particular state, what I would envision on a go-forward basis, we’d work with Ocwen on a remedy for the MSRs that we owned. And I think that’s the way I would think about it.

Got it. Okay. And then on the purchase agreement you guys announced with Prosper. Can you maybe give us a little bit of color on how you got comfortable with the credit performance of the loans that have been originating? And then maybe, also more broadly comment on if you think there may be other opportunities out there for acquiring consumer loans, or maybe, even other loan products like non-core MR or something like that? Thanks.

Sure. So the way that we’d be – talking about the loans for a second, there are 3-year and 5-year loans typically. The weighted average coupon for the consortium is 17%. The FICOs are 710. So they are reasonably high FICO borrowers. We think, based on our loss assumptions and based on where we could finance them on bank lines as well as finance them in the public markets, we think the leverage returns after losses are probably going to the north of – my guess is quite frankly, they could be north of 20%. We have the ability to buy these loans if we want to buy these loans. If we don’t want to buy these loans, we don’t have to buy these loans. And I think that’s kind of the way to think about it. So we will continue to monitor performance of the underlying assets. I think I pointed out on an earlier call last year that we had purchased some consumer loans from Prosper, and I would tell the results on those loans so far has been terrific. So I think our experience in having a portfolio prior to agreeing on this deal with a broader group has been very good. The results have been very good. And we hopefully on a go-forward basis, we expect the results to be very good. While saying that if they’re not we just won’t buy the loans.

Okay. Appreciate the comments, thank you.

Your next question comes from Fred Small, Compass Point. Your line is open.

Hi, good morning. Thanks for taking my questions.

Hey, Fred.

Couple more on the Ocwen stuff. Quickly, on the equity statement, you said you plan to purchase, was that 4.7%?

It’s 4.9%. It’s about 8.1 million shares, and the total investment amount is approximately $13.9 million.

Okay. And are you buying that from a specific holder or is that an investment you’ve already made?

No. This is in conjunction with a broader deal with Ocwen.

Okay. Got it. But it’s not new Ocwen equity?

Quite frankly, I don’t know how they’re going to deal with it, but it could be. I’m just not sure.

Okay. Next one, just in terms of the subservicing agreement with them, I think you said, 5 years is where you think it will be the term of the contract? Is that – will that have additional servicer rating triggers from the rating’s agencies? And is Ocwen currently in compliance with the triggers in the subservicing deal in terms of how you’re thinking about it?

Yes, we don’t – this is some language that we’re going to continue to work on over the course of the next couple of days. We would expect them to be pretty much industry standard. Quite frankly, we will continue to work with Ocwen, any which way we can but being mindful that we need to protect our shareholders. So there is a bunch of drafting that’s not done that still needs to be done. And that will occur over the course of the next number of days.

Got it. And just on the payment for the – so you are buying the rest of the MSR that you didn’t own or essentially what Ocwen had not initially sold to, it’s our assess, is that the right way to think about it?

Yes.

Okay. And just under the churn – as things were currently set, could you already have moved the – you could have already moved the ownership of the MSR or the PSA over to NRZ on a portion of that, the portion that you owned without paying Ocwen anything. Is that correct?

Well, it’s – I mean Fred, I know where you’re kind of going with this. We believe this is the best for us, the best for Ocwen and the best for the entire system. And I think that’s the way – rather than sitting in and having any kind of dispute in any way, if you think about it, there is a number of winners in this transaction. First and foremost, the mortgage loans do not get moved from one servicer to another. So we think from a consumer perspective that’s a great thing. That’s one. Two is, from a liquidity perspective, this gets Ocwen on the right track. And the sinister view of us versus Ocwen no longer exists as a result of this deal. They are a counter-party to us. They are a partner to us. And going forward, we want to see Ocwen succeed and do really, really well just like we want to do well. So that’s the way that we’re viewing this transaction.

Okay. Great. Of course, that’s helpful. Very good clarification. Then last one, I don’t know if it came out explicitly as on and off, but in terms of downstream services, I know that there was a carve-out in the PHH subservicing agreements, specifically for REO. That’s included in the downstream services with Ocwen, meaning Ocwen directs their, I think, REO sales to ASPS and Hubzu, you’ll have control over whether or not those go to ASPS and Hubzu going forward, if the agreement works out as you described?

That is correct

Okay. And would you look to diversify away from ASPS and Hubzu?

I think we are going – I pointed out earlier in the call, we’re going to view this, the deal has been worked on for a while and well into the night on both sides. This is truly for us an economic transaction as well as something that shores up the system. So if it’s something that works where quite frankly the economics work for us and it works for other parties, we’ll consider anything. But we need to make sure, number one, that everybody – everything is compliant with the appropriate regulatory authorities. And then from an economic standpoint, we’re going to do what we believe works for our shareholders.

Okay, got it. Thanks. Got it. Last one just on the Prosper equity investment about the investment in the loans targeted 15% leverage yields. Does that include the warrants for Prosper equity?

No. That’s a total separate – that’s totally separate.

Okay, great. Well, thanks a lot, congrats.

Thank you.

Your next question comes from Ken Bruce from Bank of America Merrill Lynch. Your line is open.

Thanks, good morning.

Hi, Ken.

Got a busy weekend. Let’s start with Ocwen. I guess, in terms of the equity stake, are there going to be or do you envision any restrictions on your ownership of that equity stake?

I’m sure there’ll be something. It’s not like we’re investing $13 million or $14 million or 4.9% into Ocwen today, and we intend on selling it if and when their stock goes to $3 or $4. I think the messaging behind this is it’s something that hopefully is a longer-term thing where we ensure mutual success. I’m sure there’ll be some restrictions, but again, all these details have been worked on through the night. So I don’t – we don’t have final details at this point. But again, it’s meant to kind of giving the market a good message that they are our partner and we’re their partner and mutual success is a wonderful thing for both of us.

Okay. And are there – just kind of a leading question. Is there any consideration for getting a board seat in – as part of that ownership stake?

Not as of now. We haven’t – not as of now.

Ok. The reason I ask and obviously this Ocwen situation has been pretty controversial, I guess, from the market’s perspective. Given kind of the nature of some of the regulatory challenges that they have got, it would appear from an outsider’s point of view that they’re a bit of a liability. So I’m trying to figure out in terms of your getting closer to them in certain in every respect, when ever respect – if in fact there if you got protections in place in order to prevent any potential downside from future mishandling and how you’re looking at protecting NRZ shareholders from that standpoint?

Yes. I think I pointed out before a couple of things. One is the portfolio that Ocwen currently services where we own the Excess, we’ve seen no deterioration at all on our portfolio, quite frankly. I know they’re – Ocwen is in the middle of a little bit of storm. But in conversations with Ron and his team, they are doing everything they can to make sure they ride their ship. As it relates to our protections, we’ll have the appropriate protection that we have with our existing servicers and subservicers that will protect us. There will be bifurcation. And then there will be your standard reps and warrants. So again, all these details are being worked out as we speak, but we’ll have the appropriate protections for us as we go forward.

Right. We can take some of this off-line. I guess, when you look at some of the issues are not performance-related, they’re basically – regulators have obviously a different mandate, and so they’re just approaching it differently than, I think, other market participants. So I just find that there is other issues that probably need to be considered. I guess, on Prosper on those transactions, who is handling the servicing for the consumer loans? Does that stay with Prosper or does that transfer?

It stays with Prosper.

And then I guess, just pulling back, just given some of the nature of your investments are going to be equity-related, any thoughts as to how we should be viewing that. Obviously, the portfolio is kind of mix of an eclectic mix of assets to start with. Now you’re going to include equity in that at some point. Is there any broader view as to how you’re thinking about the overall portfolio, or are these really just frankly equity positions that are smart given kind of the nature of the investments that you’re making into each of these related asset classes?

I mean, listen, the Ocwen one obviously is strategic. I think it shows a good alliance between us and Ocwen. The other one, if you think about Prosper, there is no equity. We haven’t given a dime or penny of equity to Prosper. The only thing we have done is purchased loans, where we’ll do securitizations and/or financings around those loans, where we think, quite frankly, the levered returns are going to be north of 20%. I think the way to view the Prosper warrants is something that is a free option for us effectively that could be extremely valuable, and to the extent that they’re worth – they’re not really worth anything, then there is no skin off our back, quite frankly. It’s like in other counterparties, we’re rooting for them. There have been lofty valuations thrown around in this sector over the course of the past couple of years. We think our entry point on this is absolutely fantastic. And the deal that – between us and the consortium, we think is a very good one for all of us. While saying that, we can’t give forward-looking statements what we think that equity is worth, but we think it could be very meaningful. And getting that in light of along with buying $5 billion of loans is a very good thing. As far as the core business, you’re going to see the core business remain the same. We own Excess MSRs, we own MSRs, we have $600 billion-ish of MSRs, we’re going to execute on our call rights strategy, we’re going to accelerate that. The consumers’ space, we did the SpringCastle deal going back in 2013, the IRR in that is north of 90%. That’s been a grand slam. The Prosper one remains to be seen, but hopeful that will be good over time. I do think the consumer space is a little interesting in light of some of the recent announcements by some of the kind of consumer companies. It could create opportunities. So I think going forward the portfolio will be the same. MSRs call rights with mortgage bonds will have a consumer portfolio. I think you’ll see the servicer advance business shrink over business as advance balances continue to get reduced. And then we’ll have a loan business as a result of our call strategy, where we keep our delinquent loans. So nothing is really going to change. The equity investment here is more strategic and in alliance with what we think is a good transaction for both companies.

Great. Thank you for that color. I appreciate it.

Thank you.

Your next question comes from Bose George from KBW. Please go ahead.

Thanks. Just had a follow-up on Ocwen. What happens to the extent that Ocwen gets downgraded? And do you think this transaction reduces the likelihood of that happening or is it totally dependent?

I think this is – again, we still need to sign docs, but I think this is great for both companies. I really do. I think it helps Ocwen a ton. It takes the noise out of the system. It takes all the sinister views out, who is trying to do what to which party. So I’m hopeful, if you think about it, Ocwen getting another $425 million of cash is a great thing for that company. And working together on mutual success should be great, truthfully.

Okay. So just – but to be clear, I guess, with this increased relationship, I guess, there is less of a need to move anything if there is a downgrade at Ocwen, is that fair?

Yes, that’s correct.

Okay, great. And then in terms of closing, when do you expect this to close?

Again, we’re working through the night. So I would – we’ll get our legal teams together and begin drafting. But hopefully, over the course of the next number of weeks. Keep in mind, we are working – we’ll begin working together to move the MSRs into our name and that’s happening now or will happen this week. So it’s going to occur. We’re hopeful that we get this wrapped up in Q – what are we in Q2 now, in Q2 to early Q3.

Okay, great. Thanks.

Thanks, Bose.

I’ll now turn the call back to Michael Nierenberg, CEO, for closing remarks.

Well, thanks for joining our call. Obviously, a lot of news and a lot of excitement. We will hopefully give more clarity around the Ocwen deal over the next number of days. And I look forward to or we look forward to continuing to do what we can to create shareholder value and success for the company. Have a great day. Thank you.

This concludes today’s conference. You may now disconnect.